-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmWVwvd4dlPMteilyDd0qeg+tU6CWKiY4zlNa4Imim+qh1/SDPhAhblf+0bPC4E0 5BLF8bcmTZfpvvMbzp0k1A== 0000039473-04-000017.txt : 20041230 0000039473-04-000017.hdr.sgml : 20041230 20041230164018 ACCESSION NUMBER: 0000039473-04-000017 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20041230 DATE AS OF CHANGE: 20041230 EFFECTIVENESS DATE: 20041230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FUNDAMENTAL INVESTORS INC CENTRAL INDEX KEY: 0000039473 IRS NUMBER: 221557722 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-10760 FILM NUMBER: 041234466 BUSINESS ADDRESS: STREET 1: FOUR EMBARCADERO CTR CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4154219360 MAIL ADDRESS: STREET 1: PO BOX 7650 CITY: SAN FRANCISCO STATE: CA ZIP: 94120 497 1 sticker.txt [logo - American Funds(r)] Prospectus Supplement January 1, 2005 For the following funds with prospectuses dated February 1, 2004 - December 1, 2004 AMCAP Fund, Inc. American Balanced Fund, Inc. American High-Income Municipal Bond Fund, Inc. American High-Income Trust The Bond Fund of America, Inc. Capital World Bond Fund, Inc. Capital World Growth and Income Fund, Inc. The Cash Management Trust of America EuroPacific Growth Fund Fundamental Investors, Inc. The Growth Fund of America, Inc. The Income Fund of America, Inc. Intermediate Bond Fund of America The Investment Company of America Limited Term Tax-Exempt Bond Fund of America The New Economy Fund New Perspective Fund, Inc. SMALLCAP World Fund, Inc. The Tax-Exempt Bond Fund of America, Inc. The Tax-Exempt Fund of California The Tax-Exempt Fund of Maryland The Tax-Exempt Fund of Virginia The Tax-Exempt Money Fund of America U.S. Government Securities Fund The U.S. Treasury Money Fund of America Washington Mutual Investors Fund, Inc. Items 1, 2 and 3 below apply to the Prospectuses and, where available, to the Retirement Plan Prospectuses of the funds. 1. Beginning January 12, 2005, the "Purchase and exchange of shares" section of the Prospectus and the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus are amended to include the following: FREQUENT TRADING OF FUND SHARES The fund and American Funds Distributors, the fund's distributor, reserve the right to reject any purchase order for any reason. The fund is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the securities markets. Accordingly, purchases, including those that are part of exchange activity, that the fund or American Funds Distributors has determined could involve actual or potential harm to the fund may be rejected. Frequent trading of fund shares may lead to increased costs to the fund and less efficient management of the fund's portfolio, resulting in dilution of the value of the shares held by long-term shareholders. The fund's Board of Directors/Trustees has adopted policies and procedures with respect to frequent purchases and redemptions of fund shares. Under a new "purchase blocking policy," beginning on January 12, 2005, any American Funds shareholder redeeming shares (including redemptions that are part of an exchange transaction) having a value of $5,000 or more from an American Fund (other than an American Funds money market fund) will be precluded from investing in that fund (including investments that are part of an exchange transaction) for 30 calendar days after the redemption transaction. This prohibition will not apply to redemptions by shareholders whose shares are held on the books of third-party intermediaries that have not adopted procedures to implement this policy. American Funds Service Company will work with intermediaries to develop such procedures, at which time shareholders whose accounts are on the books of intermediaries that have adopted such procedures will be subject to this general purchase blocking policy. Certain purchases will not be prevented and certain redemptions will not trigger a purchase block, such as systematic redemptions and purchases where the entity maintaining the shareholder account is able to identify the transaction as a systematic redemption or purchase, purchases and redemptions of shares having a value of less than $5,000, retirement plan contributions, loans and distributions (including hardship withdrawals) identified as such on the retirement plan recordkeeper's system, and purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations, where the entity maintaining the shareholder account is able to identify the transaction as one of these types of transactions. The statement of additional information contains more information about how American Funds Service Company may address other potentially abusive trading activity in the American Funds. PLEASE READ REVERSE SIDE FOR IMPORTANT information Keep this Supplement with your Prospectus and/or Retirement Plan Prospectus 2. Beginning January 12, 2005, the paragraph regarding the right of reinvestment (which describes how you can reinvest proceeds from a redemption, dividend payment or capital gain distribution without a sales charge in other American Funds within 90 days after the date of the redemption or distribution) in the "How to sell shares" section of the Prospectus and the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus is amended to include the following sentence at the end of the paragraph: You may not reinvest proceeds in the American Funds as described in this paragraph if the reinvestment otherwise triggers a purchase block as described under "Frequent trading of fund shares." 3. Beginning February 1, 2005, the last bullet point under "Class A purchases not subject to sales charges" of the "Sales charges" section is deleted. Additionally, the "Individual Retirement Account (IRA) rollovers" section is amended in its entirety to read as follows: ROLLOVERS FROM RETIREMENT PLANS TO IRAS Assets from a retirement plan may be invested in Class A, B, C or F shares of the American Funds through an IRA rollover. Rollover investments to Class A shares from retirement plans will be subject to applicable sales charges. Transfers to IRAs that are attributable to American Funds investments held in SIMPLE IRAs, SEPs or SARSEPs will not be subject to a sales charge if invested in Class A shares. Rollover investments to Class B, C or F shares will be subject to the terms and conditions generally applicable to investments in these share classes as described in the prospectus and statement of additional information. Item 4 below applies only to the Prospectuses of the funds (not to Retirement Plan Prospectuses). Prospectuses are available in English and are not currently translated into other languages. 4. Beginning January 1, 2005, the Summary of the Primary Differences Among Share Classes table in the "Choosing a share class" section is amended to reflect a $50,000 purchase maximum for Class B shares. Additionally, "Purchase minimums and maximums" in the "Purchase and exchange of shares" section is amended to reflect the following: PURCHASE MINIMUMS AND MAXIMUMS The Cash Management Trust of America; The Tax-Exempt Fund of California; All other The Tax-Exempt Money Fund of America; The Tax-Exempt Fund of Virginia; American Funds The U.S. Treasury Money Fund of America The Tax-Exempt Fund of Maryland PURCHASE MINIMUMS FOR ALL CLASSES OF SHARES To establish an account $1,000 $1,000 $250 (if applicable, including retirement plan and CollegeAmerica accounts) With an automatic investment plan $1,000 $50 $50 If applicable, for a retirement plan account $25 Not applicable $25 through payroll deduction or an employer-sponsored CollegeAmerica account To add to an account $50 $50 $50 If applicable, for a retirement plan account $25 Not applicable $25 through payroll deduction or an employer-sponsored CollegeAmerica account PURCHASE MAXIMUM PER TRANSACTION $50,000 $50,000 $50,000 FOR CLASS B SHARES PURCHASE MAXIMUM PER TRANSACTION $500,000 $500,000 $500,000 FOR CLASS C SHARES
Due to the current maximum contribution limit for a CollegeAmerica account, the effective purchase maximums for Class 529-A, 529-C, 529-E and 529-F shares are each $250,000. See the CollegeAmerica Program Description for more information. You are not eligible to purchase Class B, 529-B, C or 529-C shares once your aggregate holdings in all American Funds share classes reach $100,000 in the case of Class B and 529-B shares and $1,000,000 in the case of Class C and 529-C shares. See "Sales charge reductions and waivers" below and the statement of additional information for more information regarding aggregation of accounts and accumulation of holdings. Lit. No. MFGEBS-606-1204P Litho in USA CGD/CG/9335-S3449 THE FUND PROVIDES SPANISH TRANSLATION IN CONNECTION WITH THE PUBLIC OFFERING AND SALE OF ITS SHARES. THE FOLLOWING IS A FAIR AND ACCURATE ENGLISH TRANSLATION OF A SPANISH LANGUAGE PROSPECTUS FOR THE FUND. /s/ PATRICK F. QUAN PATRICK F. QUAN SECRETARY [logo - American Funds(r)] Prospectus Supplement January 1, 2005 For the following funds with prospectuses dated February 1, 2004 - December 1, 2004 AMCAP Fund, Inc. American Balanced Fund, Inc. American High-Income Municipal Bond Fund, Inc. American High-Income Trust The Bond Fund of America, Inc. Capital World Bond Fund, Inc. Capital World Growth and Income Fund, Inc. The Cash Management Trust of America EuroPacific Growth Fund Fundamental Investors, Inc. The Growth Fund of America, Inc. The Income Fund of America, Inc. Intermediate Bond Fund of America The Investment Company of America Limited Term Tax-Exempt Bond Fund of America The New Economy Fund New Perspective Fund, Inc. SMALLCAP World Fund, Inc. The Tax-Exempt Bond Fund of America, Inc. The Tax-Exempt Fund of California The Tax-Exempt Fund of Maryland The Tax-Exempt Fund of Virginia The Tax-Exempt Money Fund of America U.S. Government Securities Fund The U.S. Treasury Money Fund of America Washington Mutual Investors Fund, Inc. Items 1, 2 and 3 below apply to the Prospectuses and, where available, to the Retirement Plan Prospectuses of the funds. 1. Beginning January 12, 2005, the "Purchase and exchange of shares" section of the Prospectus and the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus are amended to include the following: FREQUENT TRADING OF FUND SHARES The fund and American Funds Distributors, the fund's distributor, reserve the right to reject any purchase order for any reason. The fund is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the securities markets. Accordingly, purchases, including those that are part of exchange activity, that the fund or American Funds Distributors has determined could involve actual or potential harm to the fund may be rejected. Frequent trading of fund shares may lead to increased costs to the fund and less efficient management of the fund's portfolio, resulting in dilution of the value of the shares held by long-term shareholders. The fund's Board of Directors/Trustees has adopted policies and procedures with respect to frequent purchases and redemptions of fund shares. Under a new "purchase blocking policy," beginning on January 12, 2005, any American Funds shareholder redeeming shares (including redemptions that are part of an exchange transaction) having a value of $5,000 or more from an American Fund (other than an American Funds money market fund) will be precluded from investing in that fund (including investments that are part of an exchange transaction) for 30 calendar days after the redemption transaction. This prohibition will not apply to redemptions by shareholders whose shares are held on the books of third-party intermediaries that have not adopted procedures to implement this policy. American Funds Service Company will work with intermediaries to develop such procedures, at which time shareholders whose accounts are on the books of intermediaries that have adopted such procedures will be subject to this general purchase blocking policy. Certain purchases will not be prevented and certain redemptions will not trigger a purchase block, such as systematic redemptions and purchases where the entity maintaining the shareholder account is able to identify the transaction as a systematic redemption or purchase, purchases and redemptions of shares having a value of less than $5,000, retirement plan contributions, loans and distributions (including hardship withdrawals) identified as such on the retirement plan recordkeeper's system, and purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations, where the entity maintaining the shareholder account is able to identify the transaction as one of these types of transactions. The statement of additional information contains more information about how American Funds Service Company may address other potentially abusive trading activity in the American Funds. PLEASE READ REVERSE SIDE FOR IMPORTANT information Keep this Supplement with your Prospectus and/or Retirement Plan Prospectus 2. Beginning January 12, 2005, the paragraph regarding the right of reinvestment (which describes how you can reinvest proceeds from a redemption, dividend payment or capital gain distribution without a sales charge in other American Funds within 90 days after the date of the redemption or distribution) in the "How to sell shares" section of the Prospectus and the "Purchase, exchange and sale of shares" section of the Retirement Plan Prospectus is amended to include the following sentence at the end of the paragraph: You may not reinvest proceeds in the American Funds as described in this paragraph if the reinvestment otherwise triggers a purchase block as described under "Frequent trading of fund shares." 3. Beginning February 1, 2005, the last bullet point under "Class A purchases not subject to sales charges" of the "Sales charges" section is deleted. Additionally, the "Individual Retirement Account (IRA) rollovers" section is amended in its entirety to read as follows: ROLLOVERS FROM RETIREMENT PLANS TO IRAS Assets from a retirement plan may be invested in Class A, B, C or F shares of the American Funds through an IRA rollover. Rollover investments to Class A shares from retirement plans will be subject to applicable sales charges. Transfers to IRAs that are attributable to American Funds investments held in SIMPLE IRAs, SEPs or SARSEPs will not be subject to a sales charge if invested in Class A shares. Rollover investments to Class B, C or F shares will be subject to the terms and conditions generally applicable to investments in these share classes as described in the prospectus and statement of additional information. Item 4 below applies only to the Prospectuses of the funds (not to Retirement Plan Prospectuses). Prospectuses are available in English and are not currently translated into other languages. 4. Beginning January 1, 2005, the Summary of the Primary Differences Among Share Classes table in the "Choosing a share class" section is amended to reflect a $50,000 purchase maximum for Class B shares. Additionally, "Purchase minimums and maximums" in the "Purchase and exchange of shares" section is amended to reflect the following: PURCHASE MINIMUMS AND MAXIMUMS The Cash Management Trust of America; The Tax-Exempt Fund of California; All other The Tax-Exempt Money Fund of America; The Tax-Exempt Fund of Virginia; American Funds The U.S. Treasury Money Fund of America The Tax-Exempt Fund of Maryland PURCHASE MINIMUMS FOR ALL CLASSES OF SHARES To establish an account $1,000 $1,000 $250 (if applicable, including retirement plan and CollegeAmerica accounts) With an automatic investment plan $1,000 $50 $50 If applicable, for a retirement plan account $25 Not applicable $25 through payroll deduction or an employer-sponsored CollegeAmerica account To add to an account $50 $50 $50 If applicable, for a retirement plan account $25 Not applicable $25 through payroll deduction or an employer-sponsored CollegeAmerica account PURCHASE MAXIMUM PER TRANSACTION $50,000 $50,000 $50,000 FOR CLASS B SHARES PURCHASE MAXIMUM PER TRANSACTION $500,000 $500,000 $500,000 FOR CLASS C SHARES
Due to the current maximum contribution limit for a CollegeAmerica account, the effective purchase maximums for Class 529-A, 529-C, 529-E and 529-F shares are each $250,000. See the CollegeAmerica Program Description for more information. You are not eligible to purchase Class B, 529-B, C or 529-C shares once your aggregate holdings in all American Funds share classes reach $100,000 in the case of Class B and 529-B shares and $1,000,000 in the case of Class C and 529-C shares. See "Sales charge reductions and waivers" below and the statement of additional information for more information regarding aggregation of accounts and accumulation of holdings. Lit. No. MFGEBS-606-1204P Litho in USA CGD/CG/9335-S3449 FUNDAMENTAL INVESTORS, INC. Part B Statement of Additional Information March 1, 2004 as supplemented January 1, 2005 This document is not a prospectus but should be read in conjunction with the current prospectus of Fundamental Investors, Inc. (the "fund or "FI") dated March 1, 2004. The prospectus may be obtained from your financial adviser or by writing to the fund at the following address: Fundamental Investors, Inc. Attention: Secretary One Market Steuart Tower, Suite 1800 San Francisco, California 94105 (415) 421-9360 Shareholders who purchase shares at net asset value through eligible retirement plans should note that not all of the services or features described below may be available to them. They should contact their employer for details. TABLE OF CONTENTS
Item Page No. - ---- -------- Certain Investment Limitations and Guidelines . . . . . . . . . . . 2 Description of Certain Securities and Investment Techniques . . . . 2 Fundamental Policies and Investment Restrictions. . . . . . . . . . 5 Management of the Fund . . . . . . . . . . . . . . . . . . . . . . 7 Taxes and Distributions . . . . . . . . . . . . . . . . . . . . . . 21 Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . . 26 Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Sales Charge Reductions and Waivers . . . . . . . . . . . . . . . . 33 Price of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Shareholder Account Services and Privileges . . . . . . . . . . . . 41 Execution of Portfolio Transactions . . . . . . . . . . . . . . . . 44 General Information . . . . . . . . . . . . . . . . . . . . . . . . 45 Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Financial Statements
Fundamental Investors - Page 1 CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES The following limitations and guidelines are considered at the time of purchase, under normal circumstances, and are based on a percentage of the fund's net assets unless otherwise noted. This summary is not intended to reflect all of the fund's investment limitations. DEBT SECURITIES .. The fund may invest up to 5% of its assets in straight debt securities (i.e, not convertible into equity) rated Ba or below by Moody's Investors Service, Inc. ("Moody's") and BB or below by Standard & Poor's Corporation ("S&P") or unrated but determined to be of equivalent quality. NON-U.S. SECURITIES .. The fund may invest up to 30% of its assets in securities of issuers that are domiciled outside the United States and not included in the S&P 500 Composite Index. * * * * * * The fund may experience difficulty liquidating certain portfolio securities during significant market declines or periods of heavy redemptions. DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES The descriptions below are intended to supplement the material in the prospectus under "Investment Objective, Strategies and Risks." EQUITY SECURITIES - Equity securities represent an ownership position in a company. Equity securities held by the fund typically consist of common stocks. The prices of equity securities fluctuate based on, among other things, events specific to their issuers and market, economic and other conditions. The growth-oriented, equity-type securities generally purchased by the fund may involve large price swings and potential for loss. DEBT SECURITIES - Debt securities are used by issuers to borrow money. Issuers pay investors interest and generally must repay the amount borrowed at maturity. Some debt securities, such as zero coupon bonds, do not pay current interest, but are purchased at a discount from their face values. The prices of debt securities fluctuate depending on such factors as interest rates, credit quality and maturity. In general, prices of debt securities decline when interest rates rise and increase when interest rates fall. Lower rated debt securities, rated Ba or below by Moody's and/or BB or below by S&P or unrated but determined to be of equivalent quality, are described by the rating agencies as speculative and involve greater risk of default or price changes due to changes in the issuer's creditworthiness than higher rated debt securities, or they may already be in default. The market prices of these securities may fluctuate more than higher quality securities and may decline significantly in periods of general economic difficulty. It may be more difficult to dispose of, or to determine the value of, lower rated debt securities. Fundamental Investors - Page 2 SECURITIES WITH EQUITY AND DEBT CHARACTERISTICS - The fund may invest in securities that have a combination of equity and debt characteristics. These securities may at times behave more like equity than debt and vice versa. Some types of convertible bonds or preferred stocks automatically convert into common stocks. The prices and yields of nonconvertible preferred stocks generally move with changes in interest rates and the issuer's credit quality, similar to the factors affecting debt securities. Convertible bonds, convertible preferred stocks and other securities may sometimes be converted into common stocks or other securities at a stated conversion ratio. These securities, prior to conversion, pay a fixed rate of interest or a dividend. Because convertible securities have both debt and equity characteristics, their value varies in response to many factors, including the value of the underlying assets, general market and economic conditions, and convertible market valuations, as well as changes in interest rates, credit spreads, and the credit quality of the issuer. INVESTING IN VARIOUS COUNTRIES - Investing outside the United States may involve additional risks, caused by, among other things, currency controls and fluctuating currency values; different accounting, auditing, financial reporting and legal standards and practices in some countries; changing local, regional and global economic, political and social conditions; expropriation; changes in tax policy; greater market volatility; differing securities market structures; and various administrative difficulties, such as delays in clearing and settling portfolio transactions or in receiving payment of dividends. The risks described above may be heightened in connection with investments in developing countries. Although there is no universally accepted definition, a developing country is generally considered to be a country in the initial stages of its industrialization cycle with a low per capita gross national product. For example, political and/or economic structures in these countries may be in their infancy and developing rapidly. Historically, the markets of developing countries have been more volatile than the markets of developed countries. The fund may invest in securities of issuers in developing countries only to a limited extent. Additional costs could be incurred in connection with the fund's investment activities outside the United States. Brokerage commissions may be higher outside the United States, and the fund will bear certain expenses in connection with its currency transactions. Furthermore, increased custodian costs may be associated with maintaining assets in certain jurisdictions. CURRENCY TRANSACTIONS - The fund may purchase and sell currencies to facilitate securities transactions and enter into forward currency contracts to protect against changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Forward currency contracts entered into by the fund will involve the purchase or sale of one currency against the U.S. dollar. While entering into forward currency transactions could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain that may result from an increase in the value of the currency. The fund will not generally attempt to protect against all potential changes in exchange rates. The fund will segregate liquid assets that will be marked to market daily to meet its forward contract commitments to the extent required by the Securities and Exchange Commission. Fundamental Investors - Page 3 Certain provisions of the Internal Revenue Code may affect the extent to which the fund may enter into forward contracts. Such transactions also may affect the character and timing of income, gain or loss recognized by the fund for U.S. federal income tax purposes. INVESTING IN SMALLER CAPITALIZATION STOCKS - The fund may invest in the stocks of smaller capitalization companies (typically companies with market capitalizations of less than $1.5 billion at the time of purchase). The investment adviser believes that the issuers of smaller capitalization stocks often provide attractive investment opportunities. However, investing in smaller capitalization stocks can involve greater risk than is customarily associated with investing in stocks of larger, more established companies. For example, smaller companies often have limited product lines, markets or financial resources, may be dependent for management on one or a few key persons, and can be more susceptible to losses. Also, their securities may be thinly traded (and therefore have to be sold at a discount from current prices or sold in small lots over an extended period of time), may be followed by fewer investment research analysts, and may be subject to wider price swings, thus creating a greater chance of loss than securities of larger capitalization companies. U.S. TREASURY SECURITIES - U.S. Treasury securities include direct obligations of the U.S. Treasury, such as Treasury bills, notes and bonds. For these securities, the payment of principal and interest is unconditionally guaranteed by the U.S. government, and thus they are of the highest possible credit quality. Such securities are subject to variations in market value due to fluctuations in interest rates, but, if held to maturity, will be paid in full. U.S. AGENCY SECURITIES - U.S. agency securities include those securities issued by certain U.S. government instrumentalities and certain federal agencies. These securities are neither direct obligations of, nor guaranteed by, the Treasury. However, they generally involve some form of federal sponsorship: some are backed by specific types of collateral; some are supported by the issuer's right to borrow from the Treasury; and others are supported only by the credit of the issuing government agency or instrumentality. These agencies and instrumentalities include, but are not limited to: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae"), Tennessee Valley Authority and Federal Farm Credit Bank System. CASH AND CASH EQUIVALENTS - These include: (i) commercial paper (for example, short-term notes up to 12 months in maturity issued by corporations, governmental bodies or bank/ corporation sponsored conduits (asset-backed commercial paper)), (ii) commercial bank obligations (for example, certificates of deposit, bankers' acceptances (time drafts on a commercial bank where the bank accepts an irrevocable obligation to pay at maturity)), (iii) savings association and savings bank obligations (for example, bank notes and certificates of deposit issued by savings banks or savings associations), (iv) securities of the U.S. government, its agencies or instrumentalities that mature, or may be redeemed, in one year or less, and (v) corporate bonds and notes that mature, or that may be redeemed, in one year or less. REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements under which the fund buys a security and obtains a simultaneous commitment from the seller to repurchase the security at a specified time and price. Repurchase agreements permit the fund to maintain liquidity and earn income over periods of time as short as overnight. The seller must maintain with the fund's custodian collateral equal to at least 100% of the repurchase price, including accrued interest, as monitored daily by the investment adviser. The fund will only enter into repurchase agreements involving securities in which it could otherwise invest and with selected Fundamental Investors - Page 4 banks and securities dealers whose financial condition is monitored by the investment adviser. If the seller under the repurchase agreement defaults, the fund may incur a loss if the value of the collateral securing the repurchase agreement has declined and may incur disposition costs in connection with liquidating the collateral. If bankruptcy proceedings are commenced with respect to the seller, realization of the collateral by the fund may be delayed or limited. RESTRICTED SECURITIES AND LIQUIDITY - The fund may purchase securities subject to restrictions on resale. Securities not actively traded will be considered illiquid unless they have been specifically determined to be liquid under procedures adopted by the fund's Board of Directors, taking into account factors such as the frequency and volume of trading, the commitment of dealers to make markets and the availability of qualified investors, all of which can change from time to time. The fund may incur certain additional costs in disposing of illiquid securities. * * * * * * PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the length of time particular investments may have been held. Short-term trading profits are not the fund's objective, and changes in its investments are generally accomplished gradually, though short-term transactions may occasionally be made. High portfolio turnover (100% or more) involves correspondingly greater transaction costs in the form of dealer spreads or brokerage commissions, and may result in the realization of net capital gains, which are taxable when distributed to shareholders. A fund's portfolio turnover rate would equal 100% if each security in the fund's portfolio were replaced once per year. The fund's portfolio turnover rates for the fiscal years ended 2003 and 2002 were 31% and 38%, respectively. See "Financial Highlights" in the prospectus for the fund's annual portfolio turnover rate for each of the last five fiscal years. FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS FUNDAMENTAL POLICIES - The fund has adopted the following fundamental policies and investment restrictions which may not be changed without approval by holders of a majority of its outstanding shares. Such majority is defined in the Investment Company Act of 1940, as amended (the "1940 Act"), as the vote of the lesser of (i) 67% or more of the outstanding voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities are present in person or by proxy, or (ii) more than 50% of the outstanding voting securities. All percentage limitations are considered at the time securities are purchased and are based on the fund's net assets unless otherwise indicated. None of the following investment restrictions involving a maximum percentage of assets will be considered violated unless the excess occurs immediately after, and is caused by, an acquisition by the fund. The fund may not: 1. borrow money or securities; 2. buy securities "on margin"; 3. effect "short sales" of securities; 4. mortgage, pledge or hypothecate securities; Fundamental Investors - Page 5 5. lend money or securities (but the purchase of a portion of an issue of publicly distributed debt securities is not considered the making of a loan); 6. invest in the securities of any issuer which, including predecessors, has a record of less than three years continuous operation; 7. invest in the securities of any issuer if any officer or director of the fund owns more than 1/2 of 1% of the securities of that issuer or if the fund's officers and directors together own more than 5% of the securities of that issuer; 8. invest any of its assets in the securities of any managed investment trust or of any other managed investment company; 9. invest more than 5% of its total assets at the market value at the time of investment in securities of any one issuer, or hold more than 10% of such securities of any one issuer, but these limitations do not apply to obligations of or guaranteed by the U.S.; 10. purchase or sell real estate; 11. purchase or sell commodities or commodity contracts; 12. act as underwriter of securities issued by other persons; 13. make investments in other companies for the purpose of exercising control or management; 14. concentrate its investments in any one industry or group of industries, but may invest up to 25% of its assets in any one industry. Notwithstanding investment restriction number 8, the fund may invest in securities of other investment companies if deemed advisable by its officers in connection with the administration of a deferred compensation plan adopted by Directors pursuant to an exemptive order granted by the Securities and Exchange Commission. For purposes of investment restriction number 14, the fund will not invest 25% or more (rather than more than 25%) of its total assets in the securities of issuers in the same industry. NON-FUNDAMENTAL POLICIES - The following policies may be changed without shareholder approval: 1. The fund will not invest in puts or calls; or invest more than 10% of the value of its total assets in securities which are not readily marketable (including repurchase agreements maturing in more than seven days or securities for which there is no active and substantial market). 2. No officer or director of the fund may sell portfolio securities to the fund or buy portfolio securities from it. 3. The fund may not issue senior securities, except as permitted by the 1940 Act. Fundamental Investors - Page 6 MANAGEMENT OF THE FUND BOARD OF DIRECTORS AND OFFICERS
YEAR FIRST NUMBER OF BOARDS POSITION ELECTED WITHIN THE FUND OTHER DIRECTORSHIPS/3/ WITH THE A DIRECTOR PRINCIPAL OCCUPATION(S) DURING COMPLEX/2/ ON WHICH HELD NAME AND AGE FUND OF THE FUND/1/ PAST 5 YEARS DIRECTOR SERVES BY DIRECTOR - ----------------------------------------------------------------------------------------------------------------------------------- "NON-INTERESTED" DIRECTORS - ----------------------------------------------------------------------------------------------------------------------------------- Joseph C. Berenato Director 2003 Chairman of the Board and CEO, 4 Ducommun Incorporated Age: 57 Ducommun Incorporated (aerospace components manufacturer) - ----------------------------------------------------------------------------------------------------------------------------------- Robert A. Fox Director 1998 Managing General Partner, Fox 7 Crompton Corporation Age: 66 Investments LP; former Professor, University of California; retired President and CEO, Foster Farms (poultry producer) - ----------------------------------------------------------------------------------------------------------------------------------- Leonade D. Jones Director 1998 Co-founder, VentureThink LLC 6 None Age: 56 (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company - ----------------------------------------------------------------------------------------------------------------------------------- John G. McDonald Director 1998 The IBJ Professor of Finance, 8 iStar Financial, Inc.; Age: 66 Graduate School of Business, Plum Creek Timber Co.; Stanford University Scholastic Corporation; Varian, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Gail L. Neale Director 1985 President, The Lovejoy 5 None Age: 69 Consulting Group, Inc. (a pro bono consulting group advising nonprofit organizations) - ----------------------------------------------------------------------------------------------------------------------------------- Henry E. Riggs Director 1989 Chairman of the Board and 4 None Age: 69 President Emeritus, Keck Graduate Institute of Applied Life Sciences - ----------------------------------------------------------------------------------------------------------------------------------- Patricia K. Woolf, Director 1998 Private investor; corporate 6 Crompton Corporation; Ph.D. director; lecturer, Department First Energy Age: 69 of Molecular Biology, Corporation; National Princeton University Life Holding Co. - -----------------------------------------------------------------------------------------------------------------------------------
Fundamental Investors - Page 7
PRINCIPAL OCCUPATION(S) DURING YEAR FIRST PAST 5 YEARS AND ELECTED POSITIONS HELD NUMBER OF BOARDS POSITION A DIRECTOR WITH AFFILIATED ENTITIES WITHIN THE FUND OTHER DIRECTORSHIPS/3/ WITH THE AND/OR OFFICER OR THE PRINCIPAL UNDERWRITER COMPLEX/2/ ON WHICH HELD NAME AND AGE FUND OF THE FUND/1/ OF THE FUND DIRECTOR SERVES BY DIRECTOR - ----------------------------------------------------------------------------------------------------------------------------------- "INTERESTED" DIRECTORS/4,5/ - ----------------------------------------------------------------------------------------------------------------------------------- James F. Chairman of 1998 President and Director, 3 None Rothenberg the Board Capital Research and Management Company; Director, American Funds Distributors, Age: 57 Inc.*; Director, American Funds Service Company*; Director, The Capital Group Companies, Inc.*;Director, Capital Group Research, Inc.* - ----------------------------------------------------------------------------------------------------------------------------------- Dina N. Perry President 1994 Senior Vice President, 1 None Capital Research and Management Company; Director, Age: 58 Capital Research Company* - -----------------------------------------------------------------------------------------------------------------------------------
Fundamental Investors - Page 8
PRINCIPAL OCCUPATION(S) DURING POSITION YEAR FIRST ELECTED PAST 5 YEARS AND POSITIONS HELD WITH THE AN OFFICER WITH AFFILIATED ENTITIES NAME AND AGE FUND OF THE FUND/1/ OR THE PRINCIPAL UNDERWRITER OF THE FUND - ---------------------------------------------------------------------------------------------------------------------------------- OTHER OFFICERS/5/ - ---------------------------------------------------------------------------------------------------------------------------------- Gordon Crawford Senior Vice 1994 Senior Vice President and Director, Capital Research and President Management Company Age: 57 - ---------------------------------------------------------------------------------------------------------------------------------- Paul G. Haaga, Jr. Senior Vice 1994 Executive Vice President and Director, Capital Research and President Management Company; Director, The Capital Group Companies, Age: 55 Inc.*; Director, American Funds Distributors, Inc.* - ---------------------------------------------------------------------------------------------------------------------------------- Michael T. Kerr Senior Vice 1995 Senior Vice President, Capital Research Company* President Age: 44 - ---------------------------------------------------------------------------------------------------------------------------------- Martin Romo Senior Vice President 1999 Executive Vice President and Director, Capital Research Company* Age: 36 - ---------------------------------------------------------------------------------------------------------------------------------- Ronald B. Morrow Vice President 2004 Senior Vice President, Capital Research Company* Age: 58 - ---------------------------------------------------------------------------------------------------------------------------------- Patrick F. Quan Secretary 1989-1998 Vice President - Fund Business Management Group, Capital 2000 Research and Management Company Age: 45 - ---------------------------------------------------------------------------------------------------------------------------------- Sheryl F. Johnson Treasurer 1998 Vice President - Fund Business Management Group, Capital Research and Management Company Age: 35 - ---------------------------------------------------------------------------------------------------------------------------------- David A. Pritchett Assistant Treasurer 1999 Vice President - Fund Business Management Group, Capital Research and Management Company Age: 37 - ----------------------------------------------------------------------------------------------------------------------------------
* Company affiliated with Capital Research and Management Company. 1 Directors and officers of the fund serve until their resignation, removal or retirement. 2 Capital Research and Management Company manages the American Funds, consisting of 29 funds. Capital Research and Management Company also manages American Funds Insurance Series, which serves as the underlying investment vehicle for certain variable insurance contracts, and Endowments, whose shareholders are limited to certain non-profit organizations. 3 This includes all directorships (other than those of the American Funds) that are held by each Director as a director of a public company or a registered investment company. 4 "Interested persons" within the meaning of the 1940 Act on the basis of their affiliation with the fund's investment adviser, Capital Research and Management Company, or affiliated entities (including the fund's principal underwriter). 5 All of the officers listed, except Ronald B. Morrow and Martin Romo, are officers and/or directors/trustees of one or more of the other funds for which Capital Research and Management Company serves as investment adviser. THE ADDRESS FOR ALL DIRECTORS AND OFFICERS OF THE FUND IS 333 SOUTH HOPE STREET - - 55TH FLOOR, LOS ANGELES, CALIFORNIA 90071, ATTENTION: FUND SECRETARY. Fundamental Investors - Page 9 FUND SHARES OWNED BY DIRECTORS AS OF DECEMBER 31, 2003
AGGREGATE DOLLAR RANGE/1/ OF SHARES OWNED IN ALL FUNDS IN THE AMERICAN FUNDS DOLLAR RANGE/1/ OF FUND FAMILY OVERSEEN NAME SHARES OWNED BY DIRECTOR - ------------------------------------------------------------------------------- "NON-INTERESTED" DIRECTORS - ------------------------------------------------------------------------------- Joseph C. Berenato $1 - $10,000/2/ $50,001 - $100,000 - ------------------------------------------------------------------------------- Robert A. Fox Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- Leonade D. Jones $ 10,001 - $50,000 Over $100,000 - ------------------------------------------------------------------------------- John G. McDonald $50,001 - $100,000 Over $100,000 - ------------------------------------------------------------------------------- Gail L. Neale $50,001 - $100,000 Over 100,000 - ------------------------------------------------------------------------------- Henry E. Riggs Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- Patricia K. Woolf $ 10,001 - $50,000 Over $100,000 - ------------------------------------------------------------------------------- "INTERESTED" DIRECTORS/3/ - ------------------------------------------------------------------------------- Dina N. Perry Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- James F. Rothenberg Over $100,000 Over $100,000 - -------------------------------------------------------------------------------
1 Ownership disclosure is made using the following ranges: None; $1 - $10,000; $10,001 - $50,000; $50,001 - $100,000 and Over $100,000. The amounts listed for "interested" Directors include shares owned through The Capital Group Companies, Inc. retirement plan and 401(k) plan. 2 Shares owned as of January 26, 2004 3 "Interested persons" within the meaning of the 1940 Act on the basis of their affiliation with the fund's investment adviser, Capital Research and Management Company, or affiliated entities (including the fund's principal underwriter). DIRECTOR COMPENSATION - No compensation is paid by the fund to any officer or Director who is a director, officer or employee of the investment adviser or its affiliates. The fund pays to Directors who are not affiliated with the investment adviser: (a) fees of $2,000 for each Board of Directors meeting attended, (b) $1,000 for each meeting attended as a member of a committee of the Board of Directors and (c) annual fees of either $16,000 (if the Director also receives compensation as a member of the Board of another fund advised by the investment adviser and the other Board typically meets separately from the fund's Board of Directors), or $50,000 (for all other unaffiliated Directors), a pro rata portion of which is paid by the fund and another fund whose Board meets jointly with the fund's Board of Directors. The payment by the fund to certain unaffiliated Directors of a larger per fund annual fee reflects the significant time and labor commitment required of any mutual fund Board member overseeing even one fund. The Nominating Committee of the Board of Directors, a Committee comprised exclusively of Directors not affiliated with the investment adviser, reviews Director compensation periodically, and typically recommends adjustments every other year. In making its recommendations, the Nominating Committee considers a number of factors, including operational, regulatory and other developments affecting the scope and complexity of the Board's oversight obligations, as well as Fundamental Investors - Page 10 comparative industry data. In lieu of meeting attendance fees, members of the Proxy Committee receive an annual retainer fee of $4,500 from the fund if they serve as a member of four proxy committees, or $6,250 if they serve as a member of two proxy committees, meeting jointly. No pension or retirement benefits are accrued as part of fund expenses. The Directors may elect, on a voluntary basis, to defer all or a portion of their fees through a deferred compensation plan in effect for the fund. The fund also reimburses certain expenses of the Directors who are not affiliated with the investment adviser. DIRECTOR COMPENSATION PAID DURING THE FISCAL YEAR ENDED DECEMBER 31, 2003
TOTAL COMPENSATION (INCLUDING AGGREGATE COMPENSATION VOLUNTARILY DEFERRED (INCLUDING VOLUNTARILY COMPENSATION/1/) DEFERRED COMPENSATION/1/) FROM ALL FUNDS MANAGED BY FROM THE FUND CAPITAL RESEARCH AND MANAGEMENT NAME COMPANY OR ITS AFFILIATES/2/ ----------------------------------------------------------------------------------------------------------------------------------- Joseph C. Berenato/3//,4/ $ 2,334 $ 54,584 - ------------------------------------------------------------------------------------------------------------------------------------ Robert A. Fox/3/ 28,500 198,500 - ------------------------------------------------------------------------------------------------------------------------------------ Leonade D. Jones 28,625 171,540 - ------------------------------------------------------------------------------------------------------------------------------------ John G. McDonald/3/ 26,000 270,500 - ------------------------------------------------------------------------------------------------------------------------------------ Gail L. Neale/3/ 23,750 96,500 - ------------------------------------------------------------------------------------------------------------------------------------ Henry E. Riggs/3/ 25,000 108,000 - ------------------------------------------------------------------------------------------------------------------------------------ Patricia K. Woolf/3/ 27,500 161,000 - ------------------------------------------------------------------------------------------------------------------------------------
1 Amounts may be deferred by eligible Directors under a non-qualified deferred compensation plan adopted by the fund in 1993. Deferred amounts accumulate at an earnings rate determined by the total return of one or more American Funds as designated by the Directors. Compensation for the fiscal year ended December 31, 2003 includes earnings on amounts deferred in previous fiscal years. 2 Capital Research and Management Company manages the American Funds, consisting of 29 funds. Capital Research and Management Company also manages American Funds Insurance Series, which serves as the underlying investment vehicle for certain variable insurance contracts, and Endowments, whose shareholders are limited to certain non-profit organizations. 3 Since the deferred compensation plan's adoption, the total amount of deferred compensation accrued by the fund (plus earnings thereon) through the 2003 fiscal year for participating Directors is as follows: Joseph C. Berenato ($2,442), Robert A. Fox ($144,906), John G. McDonald ($164,992), Gail L. Neale ($18,610), Henry E. Riggs ($291,988) and Patricia K. Woolf ($62,873). Amounts deferred and accumulated earnings thereon are not funded and are general unsecured liabilities of the fund until paid to the Directors. 4 Elected effective December 11, 2003. As of February 1, 2004, the officers and Directors of the fund and their families, as a group, owned beneficially or of record less than 1% of the outstanding shares of the fund. FUND ORGANIZATION AND THE BOARD OF DIRECTORS - The fund, an open-end, diversified management investment company, was organized as a Delaware corporation on October 17, 1932 and reincorporated in Maryland on February 1, 1990. Although the Board of Directors has delegated day-to-day oversight to the investment adviser, all fund operations are supervised by the fund's Board, which meets periodically and performs duties required by applicable state and federal laws. Fundamental Investors - Page 11 Under Maryland law, the fund's business and affairs are managed under the direction of the Board of Directors, and all powers of the fund are exercised by or under the authority of the Board except as reserved to the shareholders by law or the fund's charter or by-laws. Maryland law requires each Director to perform his/her duties as a Director, including his/her duties as a member of any Board committee on which he/she serves, in good faith, in a manner he/she reasonably believes to be in the best interest of the fund, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Members of the Board who are not employed by the investment adviser or its affiliates are paid certain fees for services rendered to the fund as described above. They may elect to defer all or a portion of these fees through a deferred compensation plan in effect for the fund. The fund has several different classes of shares, including Class A, B, C, F, 529-A, 529-B, 529-C, 529-E, 529-F, R-1, R-2, R-3, R-4 and R-5 shares. The 529 share classes are available only through CollegeAmerica to investors establishing qualified higher education savings accounts. The R share classes are generally available only to employer-sponsored retirement plans. Class R-5 shares are also available to clients of the Personal Investment Management Group of Capital Guardian Trust Company who do not have an intermediary associated with their accounts and without regard to the $1 million purchase minimum. The R share classes are described in more detail in the fund's retirement plan prospectus and retirement plan statement of additional information. Shares of each class represent an interest in the same investment portfolio. Each class has pro rata rights as to voting, redemption, dividends and liquidation, except that each class bears different distribution expenses and may bear different transfer agent fees and other expenses properly attributable to the particular class as approved by the Board of Directors and set forth in the fund's rule 18f-3 Plan. Each class' shareholders have exclusive voting rights with respect to the respective class' rule 12b-1 Plans adopted in connection with the distribution of shares and on other matters in which the interests of one class are different from interests in another class. Shares of all classes of the fund vote together on matters that affect all classes in substantially the same manner. Each class votes as a class on matters that affect that class alone. Note that CollegeAmerica account owners are not shareholders of the fund and accordingly, do not have the rights of a shareholder, such as the right to vote proxies relating to fund shares. As the legal owner of the fund's shares, the Virginia College Savings Plan will vote any proxies relating to fund shares. The fund does not hold annual meetings of shareholders. However, significant matters that require shareholder approval, such as certain elections of Board members or a change in a fundamental investment policy, will be presented to shareholders at a meeting called for such purpose. Shareholders have one vote per share owned. At the request of the holders of at least 10% of the shares, the fund will hold a meeting at which any member of the Board could be removed by a majority vote. COMMITTEES OF THE BOARD OF DIRECTORS - The fund has an Audit Committee comprised of Joseph C. Berenato, Robert A. Fox, Leonade D. Jones and John G. McDonald, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee provides oversight regarding the fund's accounting and financial reporting policies and practices, its internal controls and the internal controls of the fund's principal service providers. The Committee acts as a liaison between the fund's independent auditors and the full Board of Directors. Two Audit Committee meetings were held during the 2003 fiscal year. Fundamental Investors - Page 12 The fund has a Governance and Contracts Committee comprised of Joseph C. Berenato, Robert A. Fox, Leonade D. Jones, John G. McDonald, Gail L. Neale, Henry E. Riggs and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee's function is to request, review and consider the information deemed necessary to evaluate the terms of certain agreements between the fund and its investment adviser or the investment adviser's affiliates, such as the Investment Advisory and Service Agreement, Principal Underwriting Agreement, Administrative Services Agreement and Plans of Distribution under rule 12b-1 of the 1940 Act, that the fund may enter into, renew or continue, and to make its recommendations to the full Board of Directors on these matters. One Contracts Committee meeting was held during the 2003 fiscal year. The fund has a Nominating Committee comprised of Robert A. Fox, Leonade D. Jones, John G. McDonald, Gail L. Neale and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee periodically reviews such issues as the Board's composition, responsibilities, committees, compensation and other relevant issues, and recommends any appropriate changes to the full Board of Directors. The Committee also evaluates, selects and nominates independent director candidates to the full Board of Directors. While the Committee normally is able to identify from its own and other resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the Board. Such suggestions must be sent in writing to the Nominating Committee of the fund, addressed to the fund's Secretary, and must be accompanied by complete biographical and occupational data on the prospective nominee, along with a written consent of the prospective nominee for consideration of his or her name by the Committee. Five Nominating Committee meetings were held during the 2003 fiscal year. The fund has a Proxy Committee comprised of Robert A. Fox, Leonade D. Jones, John G. McDonald, Henry E. Riggs and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee's functions include establishing and reviewing procedures and policies for voting proxies of companies held in the fund's portfolio, making determinations with regard to certain contested proxy voting issues, and discussing related current issues. Four Proxy Committee meetings were held during the 2003 fiscal year. PRINCIPAL FUND SHAREHOLDERS - The following table identifies those investors who own of record or are known by the fund to own beneficially 5% or more of any class of its shares as of the opening of business on February 1, 2004:
NAME AND ADDRESS OWNERSHIP PERCENTAGE - ---------------------------------------------------------------------------- Edward D. Jones & Co. Class A 16.63% 201 Progress Pkwy. Class B 11.04 Maryland Hts., MO 63043-3009 - ---------------------------------------------------------------------------- MLPF&S For the Sole Benefit of Its Customers Class B 5.44 4800 Deer Lake Dr. E, Fl. 2 Class C 12.92 Jacksonville, FL 32246-6484 - ---------------------------------------------------------------------------- Citigroup Global Markets Inc. Class C 12.46 333 W. 34th St. New York, NY 10001-2402 - ---------------------------------------------------------------------------- Charles Schwab & Co. Inc. Class F 5.45 101 Montgomery St. San Francisco, CA 94104-4122 - ----------------------------------------------------------------------------
Fundamental Investors - Page 13 INVESTMENT ADVISER - The investment adviser, Capital Research and Management Company, founded in 1931, maintains research facilities in the United States and abroad (Los Angeles, San Francisco, New York, Washington, D.C., London, Geneva, Hong Kong, Singapore and Tokyo) with a staff of professionals, many of whom have significant investment experience. The investment adviser is located at 333 South Hope Street, Los Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821. The investment adviser's research professionals travel several million miles a year, making more than 5,000 research visits in more than 50 countries around the world. The investment adviser believes that it is able to attract and retain quality personnel. The investment adviser is a wholly owned subsidiary of The Capital Group Companies, Inc. The investment adviser is responsible for managing more than $500 billion of stocks, bonds and money market instruments and serves over 20 million shareholder accounts of all types throughout the world. These investors include individuals, privately owned businesses and large corporations as well as schools, colleges, foundations and other non-profit and tax-exempt organizations. INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and Service Agreement (the "Agreement") between the fund and the investment adviser will continue in effect until August 31, 2005, unless sooner terminated, and may be renewed from year to year thereafter, provided that any such renewal has been specifically approved at least annually by: (i) the Board of Directors, or by the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the fund, and (ii) the vote of a majority of Directors who are not parties to the Agreement or interested persons (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Agreement provides that the investment adviser has no liability to the fund for its acts or omissions in the performance of its obligations to the fund not involving willful misconduct, bad faith, gross negligence or reckless disregard of its obligations under the Agreement. The Agreement also provides that either party has the right to terminate it, without penalty, upon 60 days' written notice to the other party, and that the Agreement automatically terminates in the event of its assignment (as defined in the 1940 Act). In considering the renewal of the Agreement each year, the Contracts Committee of the Board of Directors evaluates information provided by the investment adviser in accordance with Section 15(c) of the 1940 Act, and presents its recommendations to the full Board of Directors. In approving the renewal of the Agreement for the current period, the Committee gave consideration to a wide variety of factors, including, among others the high quality of the services provided by the investment adviser, the financial strength and stability of the investment adviser, the generally excellent relative investment results of the fund, the overall reasonableness of the management fees and comparative expense ratios of the fund, the depth, quality and integrity of the investment adviser and its personnel and its longstanding commitment to excellence. Based on their review, the Committee and the Board concluded that the advisory fees and expenses of Fundamental Investors - Page 14 the fund are fair, both absolutely and in comparison with those of other funds in the industry, and that shareholders have received reasonable value in return for paying fees and expenses. The investment adviser, in addition to providing investment advisory services, furnishes the services and pays the compensation and travel expenses of persons to perform the fund's executive, administrative, clerical and bookkeeping functions, and provides suitable office space, necessary small office equipment and utilities, general purpose accounting forms, supplies, and postage used at the fund's offices. The fund pays all expenses not assumed by the investment adviser, including, but not limited to: custodian, stock transfer and dividend disbursing fees and expenses; shareholder recordkeeping and administrative expenses; costs of the designing, printing and mailing of reports, prospectuses, proxy statements, and notices to its shareholders; taxes; expenses of the issuance and redemption of fund shares (including stock certificates, registration and qualification fees and expenses); expenses pursuant to the fund's Plans of Distribution (described below); legal and auditing expenses; compensation, fees and expenses paid to Directors unaffiliated with the investment adviser; association dues; costs of stationery and forms prepared exclusively for the fund; and costs of assembling and storing shareholder account data. As compensation for its services, the investment adviser receives a monthly fee which is based on average daily net assets and is calculated at an annual rate of 0.39% on the first $1 billion of the fund's net assets, plus 0.336% on net assets over $1 billion to $2 billion, plus 0.30% on net assets over $2 billion to $3 billion, plus 0.276% on net assets over $3 billion to $5 billion, plus 0.27% on net assets over $5 billion to $8 billion, plus 0.258% on net assets over $8 billion to $13 billion, plus 0.252% on net assets over $13 billion to $17 billion, plus 0.250% on net assets over $17 billion to $21 billion, plus 0.245% on net assets over $21 billion to $27 billion, plus 0.240% on net assets over $27 billion. In connection with the approval of the Agreement by the fund's Board of Directors, the investment adviser has agreed to waive any fees to the extent they would exceed those payable under the rate structure contained in its previous agreement. The fee structure referenced above is lower than that in the previous agreement except in the event that the fund's net assets were to fall below $8 billion when fees are equal to, or higher than, that in the previous agreement. The Agreement provides for a management fee reduction to the extent that the annual ordinary operating expenses of the fund's Class A shares exceed 1% of the average net assets in excess thereof. Expenses which are not subject to these limitations are interest, taxes and extraordinary expenses. Expenditures, including costs incurred in connection with the purchase or sale of portfolio securities, which are capitalized in accordance with generally accepted accounting principles applicable to investment companies, are accounted for as capital items and not as expenses. To the extent the fund's management fee must be waived due to Class A share expense ratios exceeding the expense limitations described above, management fees will be reduced similarly for all classes of shares of the fund, or other Class A fees will be waived in lieu of management fees. For the fiscal years ended December 31, 2003, 2002 and 2001, the investment adviser received from the fund advisory fees of $48,382,000, $51,014,000 and $54,760,000, respectively. Effective for the period from September 1, 2004 until August 31, 2005, the investment adviser has agreed to waive 5% of the management fees that it is otherwise entitled to receive under the Fundamental Investors - Page 15 Agreement. As a result of this waiver, management fees will be reduced similarly for all classes of shares of the fund. ADMINISTRATIVE SERVICES AGREEMENT - The Administrative Services Agreement (the "Administrative Agreement") between the fund and the investment adviser relating to the fund's Class C, F and 529 shares will continue in effect until August 31, 2005, unless sooner terminated, and may be renewed from year to year thereafter, provided that any such renewal has been specifically approved at least annually by the vote of a majority of Directors who are not parties to the Administrative Agreement or interested persons (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Administrative Agreement provides that the fund may terminate the agreement at any time by vote of a majority of Directors who are not interested persons of the fund. The investment adviser has the right to terminate the Administrative Agreement upon 60 days' written notice to the fund. The Administrative Agreement automatically terminates in the event of its assignment (as defined in the 1940 Act). Under the Administrative Agreement, the investment adviser provides certain transfer agent and administrative services for shareholders of the fund's Class C and F shares, and all Class 529 shares. The investment adviser contracts with third parties, including American Funds Service Company, the fund's Transfer Agent, to provide these services. Services include, but are not limited to, shareholder account maintenance, transaction processing, tax information reporting and shareholder and fund communications. In addition, the investment adviser monitors, coordinates and oversees the activities performed by third parties providing such services. As compensation for its services, the investment adviser receives transfer agent fees for transfer agent services provided to the fund's applicable share classes. Transfer agent fees are paid monthly according to a fee schedule contained in a Shareholder Services Agreement between the fund and American Funds Service Company. The investment adviser also receives an administrative services fee for administrative services provided to the fund's applicable share classes. Administrative services fees are paid monthly, accrued daily and calculated at the annual rate of 0.15% of the average daily net assets of each share class, as applicable. During the 2003 fiscal period, administrative services fees were:
ADMINISTRATIVE SERVICES FEE - -------------------------------------------------------------------------------------------------------- CLASS C $603,000 - -------------------------------------------------------------------------------------------------------- CLASS F 602,000 - -------------------------------------------------------------------------------------------------------- CLASS 529-A 98,000 - -------------------------------------------------------------------------------------------------------- CLASS 529-B 26,000 - -------------------------------------------------------------------------------------------------------- CLASS 529-C 34,000 - -------------------------------------------------------------------------------------------------------- CLASS 529-E 5,000 - -------------------------------------------------------------------------------------------------------- CLASS 529-F 1,000 - --------------------------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER AND PLANS OF DISTRIBUTION - American Funds Distributors, Inc. (the "Principal Underwriter") is the principal underwriter of the fund's shares. The Principal Fundamental Investors - Page 16 Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071; 135 South State College Boulevard, Brea, CA 92821; 3500 Wiseman Boulevard, San Antonio, TX 78251; 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240; and 5300 Robin Hood Road, Norfolk, VA 23513. The Principal Underwriter receives revenues from sales of the fund's shares. For Class A and 529-A shares, the Principal Underwriter receives commission revenue consisting of that portion of the Class A and 529-A sales charge remaining after the allowances by the Principal Underwriter to investment dealers. For Class B and 529-B shares, the Principal Underwriter sells the rights to the 12b-1 fees paid by the fund for distribution expenses to a third party and receives the revenue remaining after compensating investment dealers for sales of Class B and 529-B shares. The fund also pays the Principal Underwriter for advancing the immediate service fees paid to qualified dealers of Class B and 529-B shares. For Class C and 529-C shares, the Principal Underwriter receives any contingent deferred sales charges that apply during the first year after purchase. The fund pays the Principal Underwriter for advancing the immediate service fees and commissions paid to qualified dealers of Class C and 529-C shares. For Class 529-E shares, the fund pays the Principal Underwriter for advancing the immediate service fees and commissions paid to qualified dealers. For Class F and 529-F shares, the fund pays the Principal Underwriter for advancing the immediate service fees paid to qualified dealers and advisers who sell Class F and 529-F shares. Commissions, revenue or service fees retained by the Principal Underwriter after allowances or compensation to dealers were:
COMMISSIONS, ALLOWANCE OR REVENUE COMPENSATION FISCAL YEAR/PERIOD OR FEES RETAINED TO DEALERS - ----------------------------------------------------------------------------------------------------- CLASS A 2003 $ 5,197,000 $24,084,000 2002 7,494,000 35,357,000 2001 13,443,000 61,508,000 CLASS B 2003 596,000 3,754,000 2002 1,823,000 7,373,000 2001 3,490,000 17,603,000 - ----------------------------------------------------------------------------------------------------- CLASS 529-A 2003 181,000 871,000 2002 226,000 1,076,000 - ----------------------------------------------------------------------------------------------------- CLASS 529-B 2003 51,000 277,000 2002 50,000 359,000 - -----------------------------------------------------------------------------------------------------
The fund has adopted Plans of Distribution (the "Plans") pursuant to rule 12b-1 under the 1940 Act. The Principal Underwriter receives amounts payable pursuant to the Plans (see below). As Fundamental Investors - Page 17 required by rule 12b-1 and the 1940 Act, the Plans (together with the Principal Underwriting Agreement) have been approved by the full Board of Directors and separately by a majority of the Directors who are not "interested persons" of the fund and who have no direct or indirect financial interest in the operation of the Plans or the Principal Underwriting Agreement. Potential benefits of the Plans to the fund include: quality shareholder services; savings to the fund in transfer agency costs; benefits to the investment process from growth or stability of assets; and maintenance of a financially healthy management organization. The selection and nomination of Directors who are not "interested persons" of the fund are committed to the discretion of the Directors who are not "interested persons" during the existence of the Plans. The Plans may not be amended to increase materially the amount spent for distribution without shareholder approval. Plan expenses are reviewed quarterly and the Plans must be renewed annually by the Board of Directors. Under the Plans, the fund may annually expend the following amounts to finance any activity primarily intended to result in the sale of fund shares, provided the fund's Board of Directors has approved the category of expenses for which payment is being made: (i) for Class A shares, up to .25% of the average daily net assets attributable to Class A shares; (ii) for Class 529-A shares, up to 0.50% of the average daily net assets attributable to Class 529-A shares; (iii) for Class B and 529-B shares, 1.00% of the average daily net assets attributable to Class B and 529-B shares, respectively; (iv) for Class C and 529-C shares, 1.00% of the average daily net assets attributable to Class C and 529-C shares, respectively; (v) for Class 529-E shares, up to 0.75% of the average daily net assets attributable to Class 529-E shares; and (vi) for Class F and 529-F shares, up to 0.50% of the average daily net assets attributable to Class F and 529-F shares, respectively. For Class A and 529-A shares: (i) up to 0.25% is reimbursed to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) up to the amount allowable under the fund's Class A and 529-A 12b-1 limit is reimbursed to the Principal Underwriter for paying distribution-related expenses, including for Class A and 529-A shares dealer commissions and wholesaler compensation paid on sales of shares of $1 million or more purchased without a sales charge (including purchases by employer-sponsored defined contribution-type retirement plans investing $1 million or more or with 100 or more eligible employees, and retirement plans, endowments and foundations with $50 million or more in assets) ("no load purchases"). Commissions on no load purchases of Class A and 529-A shares, in excess of the Class A and 529-A Plan limitations not reimbursed to the Principal Underwriter during the most recent fiscal quarter are recoverable for five quarters, provided that such commissions do not exceed the annual expense limit. After five quarters these commissions are not recoverable. For Class B and 529-B shares: (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.75% is paid to the Principal Underwriter for distribution-related expenses, including the financing of commissions paid to qualified dealers. For Class C and 529-C shares: (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.75% is paid to the Principal Underwriter for paying distribution-related expenses, including commissions paid to qualified dealers. Fundamental Investors - Page 18 For Class 529-E shares: (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.25% is paid to the Principal Underwriter for paying distribution-related expenses, including commissions paid to qualified dealers. For Class F and 529-F shares, 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers or advisers. Currently, no compensation is paid under the fund's Class F and 529-F Plans for distribution-related expenses. During the 2003 fiscal year, 12b-1 expenses accrued and paid, and if applicable, unpaid, were:
12B-1 LIABILITY 12B-1 EXPENSES OUTSTANDING - ------------------------------------------------------------------------------ CLASS A $38,778,000 $3,232,000 - ------------------------------------------------------------------------------ CLASS B 6,809,000 684,000 - ------------------------------------------------------------------------------ CLASS C 3,117,000 336,000 - ------------------------------------------------------------------------------ CLASS F 594,000 63,000 - ------------------------------------------------------------------------------ CLASS 529-A 62,000 3,000 - ------------------------------------------------------------------------------ CLASS 529-B 123,000 15,000 - ------------------------------------------------------------------------------ CLASS 529-C 173,000 21,000 - ------------------------------------------------------------------------------ CLASS 529-E 14,000 2,000 - ------------------------------------------------------------------------------ CLASS 529-F 1,000 218 - ------------------------------------------------------------------------------
OTHER COMPENSATION TO DEALERS - American Funds Distributors, at its expense, currently provides additional compensation to investment dealers. These payments may be made, at the discretion of American Funds Distributors, to the top 75 dealers who have sold shares of the American Funds. The level of payments made to a qualifying dealer in any given year will vary and in no case would exceed the sum of (a) 0.10% of the previous year's fund sales by that dealer and (b) 0.02% of assets attributable to that dealer. For 2004, aggregate payments made by American Funds Distributors to dealers will equal approximately 0.02% of the assets of the American Funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates and, the quality of the dealer's relationship with American Funds Distributors. American Funds Distributors makes these payments to help defray the costs incurred by qualifying dealers in connection with efforts to educate financial advisers about the American Funds so that they can make recommendations and provide services that are suitable and meet shareholder needs. American Funds Distributors will, on an annual basis, determine the advisability of continuing these payments. American Funds Distributors may also pay expenses associated with meetings that facilitate educating financial advisers and shareholders about the American Funds that are conducted by dealers outside the top 75 firms. Fundamental Investors - Page 19 As of January 2004, the top dealers that American Funds Distributors anticipates will receive additional compensation include: 1717 Capital Management Company A. G. Edwards & Sons, Inc. AIG/SunAmerica Group American General/Franklin Financial Ameritas/The Advisors Group AXA Advisors, LLC Baird/NMIS Group Cadaret, Grant & Co., Inc. Cambridge Investment Research, Inc. Capital Analysts, Inc. Commonwealth Financial Network Cuna Brokerage Services, Inc. Deutsche Bank Securities Inc. Edward Jones Ferris, Baker Watts, Inc. GE Independent Accountant Network Hefren-Tillotson, Inc. Hornor, Townsend & Kent, Inc. ING Advisors Network InterSecurities, Inc. Investacorp, Inc. Janney Montgomery Scott LLC Jefferson Pilot Securities Corporation JJB Hilliard/PNC Bank Legg Mason Wood Walker, Inc. Lincoln Financial Advisors Corporation Linsco/Private Ledger Corp. McDonald Investments/Society National Bank Merrill Lynch, Pierce, Fenner & Smith Inc. Metlife Enterprises MML Investors Services, Inc. Morgan Keegan & Company, Inc. NatCity Investment, Inc. National Planning Holdings NFP Securities, Inc. PacLife Group Park Avenue Securities LLC Princor/PPI ProEquities, Inc. Raymond James Group RBC Dain Rauscher Inc. Securian/C.R.I. Securities Service Network Inc. Signator Investors, Inc. Smith Barney Stifel, Nicolaus & Company, Inc. The O.N. Equity Sales Company Fundamental Investors - Page 20 UBS Financial Services Inc. US Bancorp Piper Jaffray Group Wachovia Group WS Griffith Securities, Inc. TAXES AND DISTRIBUTIONS FUND TAXATION - The fund has elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"). A regulated investment company qualifying under Subchapter M of the Code is required to distribute to its shareholders at least 90% of its investment company taxable income (including the excess of net short-term capital gain over net long-term capital losses) and generally is not subject to federal income tax to the extent that it distributes annually 100% of its investment company taxable income and net realized capital gains in the manner required under the Code. The fund intends to distribute annually all of its investment company taxable income and net realized capital gains and therefore does not expect to pay federal income tax, although in certain circumstances, the fund may determine that it is in the interest of shareholders to distribute less than that amount. To be treated as a regulated investment company under Subchapter M of the Code, the fund must also (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to the business of investing in such securities or currencies, and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the fund's assets is represented by cash, U.S. government securities and securities of other regulated investment companies, and other securities (for purposes of this calculation, generally limited in respect of any one issuer, to an amount not greater than 5% of the market value of the fund's assets and 10% of the outstanding voting securities of such issuer) and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), or two or more issuers which the fund controls and which are determined to be engaged in the same or similar trades or businesses. Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a regulated investment company's "required distribution" for the calendar year ending within the regulated investment company's taxable year over the "distributed amount" for such calendar year. The term "required distribution" means the sum of (i) 98% of ordinary income (generally net investment income) for the calendar year, (ii) 98% of capital gain (both long-term and short-term) for the one-year period ending on October 31 (as though the one-year period ending on October 31 were the regulated investment company's taxable year), and (iii) the sum of any untaxed, undistributed net investment income and net capital gains of the regulated investment company for prior periods. The term "distributed amount" generally means the sum of (i) amounts actually distributed by the fund from its current year's ordinary income and capital gain net income and (ii) any amount on which the fund pays income tax during the periods described above. Although the fund intends to distribute its net investment income and net capital gains so as to avoid excise tax liability, the fund may determine that it is in the interest of shareholders to distribute a lesser amount. Fundamental Investors - Page 21 The following information may not apply to you if you hold fund shares in a tax-deferred account, such as a retirement plan or education savings account. Please see your tax adviser for more information. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS - Dividends and capital gain distributions on fund shares will be reinvested in shares of the fund of the same class, unless shareholders indicate in writing that they wish to receive them in cash or in shares of the same class of other American Funds, as provided in the prospectus. Dividends and capital gain distributions by 529 share classes will be automatically reinvested. Distributions of investment company taxable income and net realized capital gains to individual shareholders will be taxable whether received in shares or in cash. Shareholders electing to receive distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the net asset value of that share on the reinvestment date. DIVIDENDS - The fund intends to follow the practice of distributing substantially all of its investment company taxable income, which includes any excess of net realized short-term gains over net realized long-term capital losses. Investment company taxable income generally includes dividends, interest, net short-term capital gains in excess of net long-term capital losses, and certain foreign currency gains, if any, less expenses and certain foreign currency losses. To the extent the fund invests in stock of domestic and certain foreign corporations, it may receive "qualified dividends". The fund will designate the amount of "qualified dividends" to its shareholders in a notice sent within 60 days of the close of its fiscal year and will report "qualified dividends" to shareholders on Form 1099-DIV. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time the fund accrues receivables or liabilities denominated in a foreign currency and the time the fund actually collects such receivables, or pays such liabilities, generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures contracts, forward contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition are also treated as ordinary gain or loss. These gains or losses, referred to under the Code as "Section 988" gains or losses, may increase or decrease the amount of the fund's investment company taxable income to be distributed to its shareholders as ordinary income. If the fund invests in stock of certain passive foreign investment companies, the fund may be subject to U.S. federal income taxation on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the fund's holding period for the stock. The distribution or gain so allocated to any taxable year of the fund, other than the taxable year of the excess distribution or disposition, would be taxed to the fund at the highest ordinary income rate in effect for such year, and the tax would be further increased by an interest charge to reflect the value of the tax deferral deemed to have resulted from the ownership of the foreign company's stock. Any amount of distribution or gain allocated to the taxable year of the distribution or disposition would be included in the Fundamental Investors - Page 22 fund's investment company taxable income and, accordingly, would not be taxable to the fund to the extent distributed by the fund as a dividend to its shareholders. To avoid such tax and interest, the fund intends to elect to treat these securities as sold on the last day of its fiscal year and recognize any gains for tax purposes at that time. Under this election, deductions for losses are allowable only to the extent of any prior recognized gains, and both gains and losses will be treated as ordinary income or loss. The fund will be required to distribute any resulting income, even though it has not sold the security and received cash to pay such distributions. Upon disposition of these securities, any gain recognized is treated as ordinary income and loss is treated as ordinary loss to the extent of any prior recognized gain. Dividends from domestic corporations are expected to comprise some portion of the fund's gross income. To the extent that such dividends constitute any of the fund's gross income, a portion of the income distributions of the fund may be eligible for the deduction for dividends received by corporations. Corporate shareholders will be informed of the portion of dividends which so qualify. The dividends-received deduction is reduced to the extent that either the fund shares, or the underlying shares of stock held by the fund, with respect to which dividends are received, are treated as debt-financed under federal income tax law and is eliminated if the shares are deemed to have been held by the shareholder or the fund, as the case may be, for less than 46 days during the 90-day period beginning on the date which is 45 days before the date on which the shares become ex-dividend. Capital gain distributions are not eligible for the dividends-received deduction. A portion of the difference between the issue price of zero coupon securities and their face value ("original issue discount") is considered to be income to the fund each year, even though the fund will not receive cash interest payments from these securities. This original issue discount (imputed income) will comprise a part of the investment company taxable income of the fund which must be distributed to shareholders in order to maintain the qualification of the fund as a regulated investment company and to avoid federal income taxation at the level of the fund. In addition, some of the bonds may be purchased by the fund at a discount that exceeds the original issue discount on such bonds, if any. This additional discount represents market discount for federal income tax purposes. The gain realized on the disposition of any bond having a market discount may be treated as taxable ordinary income to the extent it does not exceed the accrued market discount on such bond or a fund may elect to include the market discount in income in tax years to which it is attributable. Generally, accrued market discount may be figured under either the ratable accrual method or constant interest method. If the fund has paid a premium over the face amount of a bond, the fund has the option of either amortizing the premium until bond maturity and reducing the fund's basis in the bond by the amortized amount, or not amortizing and treating the premium as part of the bond's basis. In the case of any debt security having a fixed maturity date of not more than one year from its date of issue, the gain realized on disposition generally will be treated as a short-term capital gain. In general, any gain realized on disposition of a security held less than one year is treated as a short-term capital gain. Fundamental Investors - Page 23 Dividend and interest income received by the fund from sources outside the United States may be subject to withholding and other taxes imposed by such foreign jurisdictions. Tax conventions between certain countries and the United States may reduce or eliminate these foreign taxes, however. Most foreign countries do not impose taxes on capital gains in respect of investments by foreign investors. CAPITAL GAIN DISTRIBUTIONS - The fund also intends to follow the practice of distributing the entire excess of net realized long-term capital gains over net realized short-term capital losses. Net capital gains for a fiscal year are computed by taking into account any capital loss carry-forward of the fund. If any net long-term capital gains in excess of net short-term capital losses are retained by the fund for reinvestment, requiring federal income taxes to be paid thereon by the fund, the fund intends to elect to treat such capital gains as having been distributed to shareholders. As a result, each shareholder will report such capital gains as long-term capital gains taxable to individual shareholders at a maximum 15% capital gains rate (maximum 20% for capital gains realized by the fund prior to May 6, 2003), will be able to claim a pro rata share of federal income taxes paid by the fund on such gains as a credit against personal federal income tax liability, and will be entitled to increase the adjusted tax basis on fund shares by the difference between a pro rata share of the retained gains and such shareholder's related tax credit. SHAREHOLDER TAXATION - In January of each year, individual shareholders of the fund will receive a statement of the federal income tax status of all distributions. Shareholders of the fund also may be subject to state and local taxes on distributions received from the fund. DIVIDENDS - Fund dividends are taxable to shareholders as ordinary income. Under the 2003 Tax Act, all or a portion of a fund's dividend distribution may be a "qualified dividend". Only fund dividends derived from qualified corporation dividends paid to the fund after December 31, 2002, and held by the fund for the appropriate holding period, will be distributed to shareholders as "qualified dividends". Interest income from bonds and money market instruments and nonqualified foreign dividends will be distributed to shareholders as nonqualified fund dividends. The fund will report on Form 1099-DIV the amount of each shareholder's dividend that may be treated as a "qualified dividend". If a shareholder meets the requisite holding period requirement, "qualified dividends" are taxable at a maximum tax rate of 15%. CAPITAL GAINS - Distributions of the excess of net long-term capital gains over net short-term capital losses which the fund properly designates as "capital gain dividends" generally will be taxable to individual shareholders. Regardless of the length of time the shares of the fund have been held by such shareholders, the portion of a capital gain distribution realized by the fund prior to May 6, 2003 is subject to a maximum tax rate of 20%, while the portion of a capital gain distribution realized by the fund on or after May 6, 2003 is subject to a maximum tax rate of 15%. The fund will report on Form 1099-DIV the portion of the overall capital gain distribution that is taxable to individual shareholders at the maximum 15% rate. Any loss realized upon the redemption of shares held at the time of redemption for six months or less from the date of their purchase will be treated as a long-term capital loss to the extent of any amounts treated as distributions of long-term capital gains during such six-month period. Fundamental Investors - Page 24 Distributions by the fund result in a reduction in the net asset value of the fund's shares. Investors should consider the tax implications of buying shares just prior to a distribution. The price of shares purchased at that time includes the amount of the forthcoming distribution. Those purchasing just prior to a distribution will subsequently receive a partial return of their investment capital upon payment of the distribution, which will be taxable to them. Redemptions of shares, including exchanges for shares of other American Funds, may result in federal, state and local tax consequences (gain or loss) to the shareholder. However, conversion from one class to another class in the same fund should not be a taxable event. If a shareholder exchanges or otherwise disposes of shares of the fund within 90 days of having acquired such shares, and if, as a result of having acquired those shares, the shareholder subsequently pays a reduced sales charge for shares of the fund, or of a different fund, the sales charge previously incurred in acquiring the fund's shares will not be taken into account (to the extent such previous sales charges do not exceed the reduction in sales charges) for the purposes of determining the amount of gain or loss on the exchange, but will be treated as having been incurred in the acquisition of such other funds. Also, any loss realized on a redemption or exchange of shares of the fund will be disallowed to the extent substantially identical shares are reacquired within the 61-day period beginning 30 days before and ending 30 days after the shares are disposed of. The fund will be required to report to the IRS all distributions of investment company taxable income and capital gains as well as gross proceeds from the redemption or exchange of fund shares, except in the case of certain exempt shareholders. Under the backup withholding provisions of Section 3406 of the Code, distributions of investment company taxable income and capital gains and proceeds from the redemption or exchange of a regulated investment company may be subject to backup withholding of federal income tax in the case of non-exempt U.S. shareholders who fail to furnish the investment company with their taxpayer identification numbers and with required certifications regarding their status under the federal income tax law. Withholding may also be required if the fund is notified by the IRS or a broker that the taxpayer identification number furnished by the shareholder is incorrect or that the shareholder has previously failed to report interest or dividend income. If the withholding provisions are applicable, any such distributions and proceeds, whether taken in cash or reinvested in additional shares, will be reduced by the amounts required to be withheld. The foregoing discussion of U.S. federal income tax law relates solely to the application of that law to U.S. persons, i.e., U.S. citizens and residents and U.S. corporations, partnerships, trusts and estates. Each shareholder who is not a U.S. person should consider the U.S. and foreign tax consequences of ownership of shares of the fund, including the possibility that such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or a lower rate under an applicable income tax treaty) on dividend income received by the shareholder. Shareholders should consult their tax advisers about the application of federal, state and local tax law in light of their particular situation. UNLESS OTHERWISE NOTED, ALL REFERENCES IN THE FOLLOWING PAGES TO CLASS A, B, C OR F SHARES ALSO REFER TO THE CORRESPONDING CLASS 529-A, 529-B, 529-C OR 529-F SHARES. CLASS 529 SHAREHOLDERS SHOULD ALSO REFER TO THE COLLEGEAMERICA PROGRAM DESCRIPTION FOR INFORMATION ON POLICIES AND SERVICES SPECIFICALLY RELATING TO COLLEGEAMERICA ACCOUNTS. Fundamental Investors - Page 25 PURCHASE OF SHARES
METHOD INITIAL INVESTMENT ADDITIONAL INVESTMENTS - ------------------------------------------------------------------------------- See "Purchase $50 minimum (except where a Minimums" for initial lower minimum is noted under investment minimums. "Purchase Minimums"). - ------------------------------------------------------------------------------- By contacting Visit any investment Mail directly to your your investment dealer dealer who is investment dealer's address registered in the printed on your account state where the statement. purchase is made, has a sales agreement with American Funds Distributors and is authorized to sell a CollegeAmerica account in the case of 529 shares. - ------------------------------------------------------------------------------- By mail Make your check Fill out the account additions payable to the fund form at the bottom of a recent and mail to the account statement, make your address indicated on check payable to the fund, the account write your account number on application. Please your check, and mail the check indicate an investment and form in the envelope dealer on the account provided with your account application. statement. - ------------------------------------------------------------------------------- By telephone Please contact your Complete the "Investments by investment dealer to Phone" section on the account open an account, then application or American follow the procedures FundsLink Authorization Form. for additional Once you establish the investments. privilege, you, your financial adviser or any person with your account information can call American FundsLine(R) and make investments by telephone (subject to conditions noted in "Shareholder Account Services and Privileges - Telephone and Internet Purchases, Redemptions and Exchanges" below). - ------------------------------------------------------------------------------- By Internet Please contact your Complete the American FundsLink investment dealer to Authorization Form. Once you open an account, then establish the privilege, you, follow the procedures your financial adviser or any for additional person with your account investments. information may access American FundsLine OnLine(R) on the Internet and make investments by computer (subject to conditions noted in "Shareholder Account Services and Privileges - Telephone and Internet Purchases, Redemptions and Exchanges" below). - ------------------------------------------------------------------------------- By wire Call 800/421-0180 to Your bank should wire your obtain your account additional investments in the number(s), if same manner as described under necessary. Please "Initial Investment." indicate an investment dealer on the account. Instruct your bank to wire funds to: Wells Fargo Bank 155 Fifth Street, Sixth Floor San Francisco, CA 94106 (ABA#121000248) For credit to the account of: American Funds Service Company a/c# 4600-076178 (fund name) (your fund acct. no.) - -------------------------------------------------------------------------------
The fund and the Principal Underwriter reserve the right to reject any purchase order. Generally, Class F shares are available only to fee-based programs of investment firms that have special agreements with the fund's distributor and certain registered investment advisers. Class B and C shares generally are not available to certain employer-sponsored retirement plans, such as 401(k) plans, 457 plans, employer-sponsored 403(b) plans and money purchase pension and Fundamental Investors - Page 26 profit sharing plans. Class 529 shares may be purchased by investors only through CollegeAmerica accounts. Class 529-E shares may be purchased only by investors participating in CollegeAmerica through an eligible employer plan. In addition, the state tax-exempt funds are offered only in certain states, and tax-exempt funds in general should not serve as retirement plan investments. PURCHASE MINIMUMS - The minimum initial investment for all American Funds, except the money market funds and the state tax-exempt funds, is $250. The minimum initial investment for the money market funds (The Cash Management Trust of America, The Tax-Exempt Money Fund of America, and The U.S. Treasury Money Fund of America) and the state tax-exempt funds (The Tax-Exempt Fund of California, The Tax-Exempt Fund of Maryland, and The Tax-Exempt Fund of Virginia) is $1,000. Purchase minimums are reduced to $50 for purchases through "Automatic Investment Plans" (except for the money market funds) or to $25 for purchases by retirement plans through payroll deduction or by employer-sponsored CollegeAmerica accounts and may be reduced or waived for shareholders of other funds in the American Funds. The minimum is $50 for additional investments (except for retirement plan payroll deduction and employer-sponsored CollegeAmerica accounts as noted above). FUND NUMBERS - Here are the fund numbers for use with our automated telephone line, American FundsLine/(R)/ (see description below):
FUND NUMBERS ---------------------------------------- FUND CLASS A CLASS B CLASS C CLASS F - -------------------------------------------------------------------------------------------------- STOCK AND STOCK/BOND FUNDS AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . 002 202 302 402 American Balanced Fund/(R)/ . . . . . . . . . . . . . . 011 211 311 411 American Mutual Fund/(R)/ . . . . . . . . . . . . . . . 003 203 303 403 Capital Income Builder/(R)/ . . . . . . . . . . . . . . 012 212 312 412 Capital World Growth and Income Fund/SM/ . . . . . . . 033 233 333 433 EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . 016 216 316 416 Fundamental Investors/SM/ . . . . . . . . . . . . . . . 010 210 310 410 The Growth Fund of America/(R)/ . . . . . . . . . . . . 005 205 305 405 The Income Fund of America/(R)/ . . . . . . . . . . . . 006 206 306 406 The Investment Company of America/(R)/ . . . . . . . . 004 204 304 404 The New Economy Fund/(R)/ . . . . . . . . . . . . . . . 014 214 314 414 New Perspective Fund/(R)/ . . . . . . . . . . . . . . . 007 207 307 407 New World Fund/SM/ . . . . . . . . . . . . . . . . . . 036 236 336 436 SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . 035 235 335 435 Washington Mutual Investors Fund/SM/ . . . . . . . . . 001 201 301 401 BOND FUNDS American High-Income Municipal Bond Fund/(R)/ . . . . . 040 240 340 440 American High-Income Trust/SM/ . . . . . . . . . . . . 021 221 321 421 The Bond Fund of America/SM/ . . . . . . . . . . . . . 008 208 308 408 Capital World Bond Fund/(R)/ . . . . . . . . . . . . . 031 231 331 431 Intermediate Bond Fund of America/SM/ . . . . . . . . . 023 223 323 423 Limited Term Tax-Exempt Bond Fund of America/SM/ . . . 043 243 343 443 The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . 019 219 319 419 The Tax-Exempt Fund of California/(R)/* . . . . . . . . 020 220 320 420 The Tax-Exempt Fund of Maryland/(R)/* . . . . . . . . . 024 224 324 424 The Tax-Exempt Fund of Virginia/(R)/* . . . . . . . . . 025 225 325 425 U.S. Government Securities Fund/SM/ . . . . . . . . . . 022 222 322 422 MONEY MARKET FUNDS The Cash Management Trust of America/(R)/ . . . . . . . 009 209 309 409 The Tax-Exempt Money Fund of America/SM/ . . . . . . . 039 N/A N/A N/A The U.S. Treasury Money Fund of America/SM/ . . . . . . 049 N/A N/A N/A ___________ *Available only in certain states.
Fundamental Investors - Page 27
FUND NUMBERS --------------------------------------------- CLASS CLASS CLASS CLASS CLASS FUND 529-A 529-B 529-C 529-E 529-F - ------------------------------------------------------------------------------- STOCK AND STOCK/BOND FUNDS AMCAP Fund/(R)/ . . . . . . . . 1002 1202 1302 1502 1402 American Balanced Fund/(R)/ . . 1011 1211 1311 1511 1411 American Mutual Fund/(R)/ . . . 1003 1203 1303 1503 1403 Capital Income Builder/(R)/ . . 1012 1212 1312 1512 1412 Capital World Growth and Income Fund/SM/ . . . . . . . . . . . 1033 1233 1333 1533 1433 EuroPacific Growth Fund/(R)/ . 1016 1216 1316 1516 1416 Fundamental Investors/SM/ . . . 1010 1210 1310 1510 1410 The Growth Fund of America/(R)/ 1005 1205 1305 1505 1405 The Income Fund of America/(R)/ 1006 1206 1306 1506 1406 The Investment Company of America/(R)/. . . . . . . . . . 1004 1204 1304 1504 1404 The New Economy Fund/(R)/ . . . 1014 1214 1314 1514 1414 New Perspective Fund/(R)/ . . . 1007 1207 1307 1507 1407 New World Fund/SM/ . . . . . . 1036 1236 1336 1536 1436 SMALLCAP World Fund/(R)/ . . . 1035 1235 1335 1535 1435 Washington Mutual Investors Fund/SM/ . . . . . . . . . . . 1001 1201 1301 1501 1401 BOND FUNDS American High-Income Trust/SM/ 1021 1221 1321 1521 1421 The Bond Fund of America/SM/ . 1008 1208 1308 1508 1408 Capital World Bond Fund/(R)/ . 1031 1231 1331 1531 1431 Intermediate Bond Fund of America/SM/ . . . . . . . . . . 1023 1223 1323 1523 1423 U.S. Government Securities Fund/SM/. . . . . . . . . . . . 1022 1222 1322 1522 1422 MONEY MARKET FUND The Cash Management Trust of America/(R)/. . . . . . . . . . 1009 1209 1309 1509 1409
SALES CHARGES CLASS A SALES CHARGES - The sales charges you pay when purchasing Class A shares of stock, stock/bond and bond funds of the American Funds are set forth below. American Funds money market funds are offered at net asset value. (See "Fund Numbers" above for a listing of the funds.) Fundamental Investors - Page 28
DEALER SALES CHARGE AS COMMISSION PERCENTAGE OF THE: AS PERCENTAGE ------------------ OF THE AMOUNT OF PURCHASE AT THE OFFERING PRICE NET AMOUNT OFFERING OFFERING -INVESTED- PRICE PRICE - ------------------------------------------- -------- ----- ----- STOCK AND STOCK/BOND FUNDS Less than $25,000 . . . . . . . . . 6.10% 5.75% 5.00% $25,000 but less than $50,000. . . 5.26 5.00 4.25 $50,000 but less than $100,000. . 4.71 4.50 3.75 BOND FUNDS Less than $100,000 . . . . . . . . 3.90 3.75 3.00 STOCK, STOCK/BOND, AND BOND FUNDS $100,000 but less than $250,000 . 3.63 3.50 2.75 $250,000 but less than $500,000 . 2.56 2.50 2.00 $500,000 but less than $750,000 . 2.04 2.00 1.60 $750,000 but less than $1 million 1.52 1.50 1.20 $1 million or more . . . . . . . . none none see below - --------------------------------------------------------------------------------
The initial sales charge paid by you on investments in Class A shares, expressed as a percentage of the offering price or the net amount invested, may be higher or lower than the percentages described in the table above due to rounding. This is because the dollar amount of the sales charge is determined by subtracting the net asset value of the shares purchased from the offering price, which is calculated to two decimal places using standard rounding criteria. The impact of rounding will vary with the size of the investment and the net asset value of the shares. Similarly, any contingent deferred sales charge paid by you on investments in Class A shares may be higher or lower than the 1% charge described below due to rounding. CLASS A PURCHASES NOT SUBJECT TO SALES CHARGES - Investments of $1 million or more are sold with no initial sales charge. HOWEVER, A 1% CONTINGENT DEFERRED SALES CHARGE (CDSC) MAY BE IMPOSED IF REDEMPTIONS ARE MADE WITHIN ONE YEAR OF PURCHASE. The following investments are not subject to any initial or contingent deferred sales charge if American Funds Service Company is notified: . investments in Class A shares made by endowments or foundations with $50 million or more in assets; . investments made by accounts that are part of certain qualified fee-based programs and that purchased Class A shares before March 15, 2001; and . Individual Retirement Account rollovers involving retirement plan assets invested in the American Funds (this particular exception will no longer be available beginning February 1, 2005). Fundamental Investors - Page 29 A dealer concession of up to 1% may be paid by the fund under its Class A Plan of Distribution to reimburse the Principal Underwriter in connection with dealer and wholesaler compensation paid by it with respect to investments made with no initial sales charge. EMPLOYER-SPONSORED RETIREMENT PLANS ON OR BEFORE MARCH 31, 2004: An employer-sponsored retirement plan (including certain 403(b) plans) may invest in Class A shares without any initial or contingent deferred sales charge if the plan invests $1 million or more, or if American Funds Service Company is notified that the plan has 100 or more eligible employees or has $50 million or more in assets. Plans investing in this manner may continue to purchase Class A shares without any initial or contingent deferred sales charge after March 31, 2004. 403(b) plans may be treated as employer-sponsored plans for sales charge purposes if: (i) the American Funds are principal investment options; (ii) the employer facilitates the enrollment process by, for example, allowing for onsite group enrollment meetings held during working hours; and (iii) there is only one dealer firm assigned to the plans. AFTER MARCH 31, 2004: . Employer-sponsored retirement plans not yet invested in Class A shares and wishing to invest without a sales charge will no longer be eligible to purchase Class A shares. Such plans may invest only in Class R shares, which are described in more detail in the fund's retirement plan prospectus. . Provided that the plan's recordkeeper can properly apply a sales charge on the plan's investments, an employer-sponsored retirement plan not yet invested in Class A shares and wishing to invest less than $1 million may invest in Class A shares, but the purchase of these shares will be subject to the applicable sales charge, regardless of whether the plan has 100 or more eligible employees or whether it has $50 million or more in assets. An employer-sponsored retirement plan that purchases Class A shares with a sales charge will be eligible to purchase additional Class A shares in accordance with the sales charge table above. If the recordkeeper cannot properly apply a sales charge on the plan's investments, then the plan may invest only in Class R shares, which are described in more detail in the fund's retirement plan prospectus. . Employer-sponsored retirement plans not yet invested in Class A shares will no longer be eligible to establish a statement of intention to purchase $1 million or more of American Funds shares in order to qualify to purchase without a sales charge. More information about statements of intention can be found under "Sales Charge Reductions and Waivers." A transfer from the Virginia Prepaid Education Program/SM/ or the Virginia Education Savings Trust/SM/ to a CollegeAmerica account will be made with no sales charge. No commission will be paid to the dealer on such a transfer. Fundamental Investors - Page 30 OTHER PURCHASES Pursuant to a determination of eligibility by a vice president or more senior officer of the Capital Research and Management Company Fund Administration Unit, or by his or her designee, Class A shares of the American Funds stock, stock/bond and bond funds may be sold at net asset value to: (1) current or retired directors, trustees, officers and advisory board members of, and certain lawyers who provide services to, the funds managed by Capital Research and Management Company, current or retired employees of Washington Management Corporation, current or retired employees and partners of The Capital Group Companies, Inc. and its affiliated companies, certain family members and employees of the above persons, and trusts or plans primarily for such persons; (2) current registered representatives and assistants directly employed by such representatives, retired registered representatives with respect to accounts established while active, or full-time employees (and their spouses, parents, and children) of dealers who have sales agreements with the Principal Underwriter (or who clear transactions through such dealers) and plans for such persons or the dealers; (3) current registered investment advisers registered with the Principal Underwriter and assistants directly employed by such registered investment advisers, retired registered investment advisers with respect to accounts established while active, or full-time employees of registered investment advisers registered with the Principal Underwriter (and their spouses, parents and children), and plans for such persons; (4) companies exchanging securities with the fund through a merger, acquisition or exchange offer; (5) insurance company separate accounts; (6) accounts managed by subsidiaries of The Capital Group Companies, Inc.; (7) The Capital Group Companies, Inc., its affiliated companies and Washington Management Corporation; (8) an individual or entity with a substantial business relationship with The Capital Group Companies, Inc. or its affiliates, or an individual or entity related or relating to such individual or entity; (9) wholesalers and full-time employees directly supporting wholesalers involved in the distribution of insurance company separate accounts whose underlying investments are managed by any affiliate of The Capital Group Companies, Inc.; and (10) full-time employees of banks that have sales agreements with the Principal Underwriter, who are solely dedicated to supporting the sale of mutual funds. Shares are offered at net asset value to these persons and organizations due to anticipated economies in sales effort and expense. Once an account is established under this net asset value privilege, additional investments can be made at net asset value for the life of the account. Fundamental Investors - Page 31 CONTINGENT DEFERRED SALES CHARGE ON CLASS A AND C SHARES - Except as described above, a CDSC of 1% applies to redemptions of Class A shares of the American Funds, other than the money market funds, made within 12 months following the purchase of Class A shares of $1 million or more made without an initial sales charge. A CDSC of 1% also applies to redemptions of Class C shares of the American Funds made within 12 months following the purchase of the Class C shares. The charge is 1% of the lesser of the value of the shares redeemed (exclusive of reinvested dividends and capital gain distributions) or the total cost of such shares. Shares held the longest are assumed to be redeemed first for purposes of calculating this CDSC. The CDSC may be waived in certain circumstances. See "CDSC Waivers for Class A, B and C Shares" below. CLASS B SALES CHARGES - Class B shares are sold without any initial sales charge. However, a CDSC may be applied to shares you sell within six years of purchase, as shown in the table below. CONTINGENT DEFERRED SALES CHARGE ON CLASS B SHARES
Year of redemption: 1 2 3 4 5 6 7+ Contingent deferred sales charge: 5% 4% 4% 3% 2% 1% 0%
Any contingent deferred sales charge paid by you on investments in Class B or C shares, expressed as a percentage of the applicable redemption amount, may be higher or lower than the percentages described above due to rounding. There is no CDSC on appreciation in share value above the initial purchase price or on shares acquired through reinvestment of dividends or capital gain distributions. In addition, the CDSC may be waived in certain circumstances. See "CDSC Waivers for Class A, B and C Shares" below. The CDSC is based on the original purchase cost or the current market value of the shares being sold, whichever is less. In processing redemptions of Class B shares, shares that are not subject to any CDSC will be redeemed first followed by shares that you have owned the longest during the six-year period. CLASS 529-E AND CLASS F SALES CHARGE - Class 529-E and F shares are sold with no initial or contingent deferred sales charge. DEALER COMMISSIONS AND COMPENSATION - For Class A shares, commissions (up to 1%) are paid to dealers who initiate and are responsible for purchases of $1 million or more, for purchases by any employer-sponsored defined contribution-type plan investing $1 million or more or with 100 or more eligible employees, IRA rollover accounts of $1 million or more, and for purchases made at net asset value by certain retirement plans, endowments and foundations with assets of $50 million or more. Commissions on investments in Class A shares are paid at the following rates: 1.00% on amounts to $4 million, 0.50% on amounts over $4 million to $10 million, and 0.25% on amounts over $10 million. Commissions are based on cumulative investments and are not annually reset. For Class B shares, compensation equal to 4.00% of the amount invested is paid by the Principal Underwriter to dealers who sell Class B shares. Fundamental Investors - Page 32 For Class C shares, compensation equal to 1.00% of the amount invested is paid by the Principal Underwriter to dealers who sell Class C shares. CONVERSION OF CLASS B AND C SHARES - Class B shares automatically convert to Class A shares in the month of the eight-year anniversary of the purchase date. Class C shares automatically convert to Class F shares in the month of the ten-year anniversary of the purchase date. Class 529-C shares will not convert to Class 529-F shares. The conversion of shares is subject to the Internal Revenue Service's continued position that the conversions are not subject to federal income tax. If the Internal Revenue Service no longer takes this position, the automatic conversion feature may be suspended. If that happened, no further conversions of Class B or C shares would occur while such suspension remained in effect, and at your option, Class B shares could be exchanged for Class A shares and Class C shares for Class F shares on the basis of the relative net asset values of the two classes, without the imposition of a sales charge or fee; however, such an exchange could constitute a taxable event for you. Absent such an exchange, Class B and C shares would continue to be subject to higher expenses for longer than eight years and ten years, respectively. SALES CHARGE REDUCTIONS AND WAIVERS REDUCING YOUR CLASS A SALES CHARGE - You and your "immediate family" (your spouse -- or equivalent if recognized under local law -- and your children under age 21) may combine investments to reduce your costs. You must let your investment dealer or American Funds Service Company (the "Transfer Agent") know at the time you purchase shares if you qualify for a reduction in your sales charge using one or any combination of the methods described below. STATEMENT OF INTENTION - You may enter into a non-binding commitment to purchase shares of the American Funds over a 13-month period and receive the same sales charge as if all shares had been purchased at once. This includes purchases made during the previous 90 days, but does not include future appreciation of your investment or reinvested distributions. The reduced sales charges and offering prices set forth in the Prospectus apply to purchases of $25,000 or more for equity funds and $100,000 or more for bond funds made within a 13-month period subject to a statement of intention (the "Statement"). The Statement is not a binding obligation to purchase the indicated amount. After March 31, 2004, employer-sponsored retirement plans not yet invested in Class A shares will no longer be eligible to establish a Statement to purchase $1 million or more without a sales charge. When a shareholder elects to use a Statement in order to qualify for a reduced sales charge on purchases of the American Funds, shares equal to 5% of the dollar amount specified in the Statement will be held in escrow in the shareholder's account out of the initial purchase (or subsequent purchases, if necessary) by the Transfer Agent. All dividends and any capital gain distributions on shares held in escrow will be credited to the shareholder's account in shares (or paid in cash, if requested). If the intended investment is not completed within the specified 13-month period, the purchaser will remit to the Principal Underwriter the difference between the sales charge actually paid and the sales charge which would have been paid if the total of such purchases had been made at a single time. The dealer assigned to the account at the end of the period will receive an appropriate commission adjustment. If the difference is not paid by the close of the Statement period, the appropriate number of shares held in escrow will be redeemed to Fundamental Investors - Page 33 pay such difference. If the proceeds from this redemption are inadequate, the purchaser will be liable to the Principal Underwriter for the balance still outstanding. The Statement may be revised upward at any time during the 13-month period, and such a revision will be treated as a new Statement, except that the 13-month period during which the purchase must be made will remain unchanged. Accordingly, upon your request, the sales charge paid on investments made 90 days prior to the Statement revision will be adjusted to reflect the revised Statement. Existing holdings eligible for rights of accumulation (see below), including Class A shares held in a fee-based arrangement, other classes of shares of the American Funds, holdings in Endowments (shares of which may be owned only by tax-exempt organizations) and any individual investments in American Legacy variable annuity contracts and variable life insurance policies (American Legacy, American Legacy II and American Legacy III, American Legacy Life, American Legacy Variable Life, and American Legacy Estate Builder) may be credited toward satisfying the Statement. During the Statement period, reinvested dividends and capital gain distributions, investments in money market funds, and investments made under a right of reinstatement will not be credited toward satisfying the Statement. The Statement will be considered completed if the shareholder dies within the 13-month Statement period. Commissions will not be adjusted or paid on the difference between the Statement amount and the amount actually invested before the shareholder's death. When the trustees of certain retirement plans purchase shares by payroll deduction, the sales charge for the investments made during the 13-month period will be handled as follows: the total monthly investment will be multiplied by 13 and then multiplied by 1.5. The current value of existing American Funds investments (other than money market fund investments) and any rollovers or transfers reasonably anticipated to be invested in non-money market American Funds during the 13-month period are added to the figure determined above. The sum is the Statement amount and applicable breakpoint level. On the first investment and all other investments made pursuant to the Statement, a sales charge will be assessed according to the sales charge breakpoint thus determined. There will be no retroactive adjustments in sales charges on investments made during the 13-month period. Shareholders purchasing shares at a reduced sales charge under a Statement indicate their acceptance of these terms with their first purchase. AGGREGATION - Sales charge discounts are available for certain aggregated investments. Qualifying investments include those made by you and your immediate family (your spouse -- or equivalent if recognized under local law -- and your children under the age of 21), if all parties are purchasing shares for their own accounts and/or: . individual-type employee benefit plan(s), such as an IRA, 403(b) plan (see exception below), or single-participant Keogh-type plan; . business accounts solely controlled by you or your immediate family (for example, you own the entire business); Fundamental Investors - Page 34 . trust accounts established by you or your immediate family. However, if the person(s) who established the trust is deceased, the trust account may be aggregated with accounts of the person who is the primary beneficiary of the trust; . endowments or foundations established and controlled by you or your immediate family; or . CollegeAmerica accounts, which will be aggregated at the account owner level (Class 529-E accounts may only be aggregated with an eligible employer plan). Individual purchases by a trustee(s) or other fiduciary(ies) may also be aggregated if the investments are: . for a single trust estate or fiduciary account, including employee benefit plans other than the individual-type employee benefit plans described above; . made for two or more employee benefit plans of a single employer or of affiliated employers as defined in the 1940 Act, again excluding individual-type employee benefit plans described above; . for a diversified common trust fund or other diversified pooled account not specifically formed for the purpose of accumulating fund shares; . for non-profit, charitable or educational organizations (or any employer-sponsored retirement plan for such an endowment or foundation) or any endowments or foundations established and controlled by the organization; or . for participant accounts of a 403(b) plan that is treated as an employer-sponsored plan (see "Class A Purchases Not Subject to Sales Charges" above), or made for two or more 403(b) plans that are treated as employer-sponsored plans of a single employer or affiliated employers as defined in the 1940 Act. Purchases made for nominee or street name accounts (securities held in the name of an investment dealer or another nominee such as a bank trust department instead of the customer) may not be aggregated with those made for other accounts and may not be aggregated with other nominee or street name accounts unless otherwise qualified as described above. CONCURRENT PURCHASES - You may combine purchases of all classes of shares of two or more funds in the American Funds, as well as individual holdings in Endowments, American Legacy variable annuity contracts and variable life insurance policies. Shares of money market funds purchased through an exchange, reinvestment or cross-reinvestment from a fund having a sales charge also qualify. However, direct purchases of American Funds money market funds are excluded. RIGHTS OF ACCUMULATION - Subject to the limitations described in the aggregation policy, you may take into account the current value of your existing holdings in all share classes of the American Funds, as well as your holdings in Endowments, to determine your sales charge on investments in accounts eligible to be aggregated, or when making a gift to an individual or charity. Alternatively, upon your request, you may take into account the amount you invested less any withdrawals (however, for this purpose, the amount invested does not include capital appreciation or reinvested dividends and capital gains). When determining your sales charge, you may also take into account the value of your Fundamental Investors - Page 35 individual holdings, as of the end of the week prior to your investment, in various American Legacy variable annuity contracts and variable life insurance policies. Direct purchases of American Funds money market funds are excluded. CDSC WAIVERS FOR CLASS A, B AND C SHARES - Any CDSC on Class A, B and C shares (and, if applicable, on the corresponding Class 529 shares) may be waived only in the following cases: (1) Permitted exchanges of shares as described in the prospectus, provided that the shares acquired by such exchanges are not redeemed within: (i) one year of the initial purchase in the case of Class A or 529-A shares, (ii) six years of the initial purchase in the case of Class B or 529-B shares, or (iii) one year of the initial purchase in the case of Class C or 529-C shares. (2) Tax-free returns of excess contributions to IRAs. (3) Redemptions due to death or post-purchase disability of a shareholder (this generally excludes accounts registered in the names of trusts and other entities). In the case of joint tenant accounts, if one joint tenant dies, a surviving joint tenant, at the time he or she notifies the Transfer Agent of the other joint tenant's death and removes the decedent's name from the account, may redeem shares from the account without incurring a CDSC. Redemptions made after the Transfer Agent is notified of the death of a joint tenant will be subject to a CDSC. (4) For Class 529-A, 529-B and 529-C shareholders only, redemptions due to a beneficiary's death, post-purchase disability or receipt of a scholarship (to the extent of the scholarship award). (5) The following types of transactions, if together they do not exceed 12% of the value of an "account" (defined below) annually (the "12% limit"): . Required minimum distributions taken from retirement accounts upon the shareholder's attainment of age 70 1/2 (required minimum distributions that continue to be taken by the beneficiary(ies) after the account owner is deceased also qualify for a waiver). . Redemptions through a systematic withdrawal plan ("SWP") (see "Automatic Withdrawals" under "Shareholder Account Services and Privileges", below). For each SWP payment, assets that are not subject to a CDSC, such as appreciation on shares and shares acquired through reinvestment of dividends and/or capital gain distributions, will be redeemed first and will count toward the 12% limit. If there is an insufficient amount of assets not subject to a CDSC to cover a particular SWP payment, shares subject to the lowest CDSC will be redeemed next until the 12% limit is reached. Any dividends and/or capital gain distributions taken in cash by a shareholder who receives payments through a SWP will also count toward the 12% limit. In the case of a SWP, the 12% limit is calculated at the time a systematic redemption is first made, and is recalculated at the time each additional systematic redemption is made. Shareholders who establish a SWP should be aware that the amount of a payment not subject to a CDSC may vary over time depending on fluctuations in the value of their accounts. This privilege may be revised or terminated at any time. Fundamental Investors - Page 36 For purposes of this paragraph, "account" means: . in the case of Class A shares, your investment in Class A shares of all American Funds (investments representing direct purchases of American Funds money market funds are excluded); . in the case of Class B shares, your investment in Class B shares of the particular fund from which you are making the redemption; and . in the case of Class C shares, your investment in Class C shares of the particular fund from which you are making the redemption. CDSC waivers are allowed only in the cases listed above. For example, CDSC waivers will not be allowed on redemptions of Class 529-B and 529-C shares due to: termination of CollegeAmerica; a determination by the Internal Revenue Service that CollegeAmerica does not qualify as a qualified tuition program under the Code; proposal or enactment of law that eliminates or limits the tax-favored status of CollegeAmerica; or the Virginia College Savings Plan eliminating the fund as an option for additional investment within CollegeAmerica. PRICE OF SHARES Shares are purchased at the offering price or sold at the net asset value price next determined after the purchase or sell order is received and accepted by the fund or the Transfer Agent; the offering or net asset value price is effective for orders received prior to the time of determination of the net asset value and, in the case of orders placed with dealers or their authorized designees, accepted by the Principal Underwriter, the Transfer Agent, a dealer or any of their designees. In the case of orders sent directly to the fund or the Transfer Agent, an investment dealer MUST be indicated. The dealer is responsible for promptly transmitting purchase and sell orders to the Principal Underwriter. Orders received by the investment dealer or authorized designee, the Transfer Agent, or the fund after the time of the determination of the net asset value will be entered at the next calculated offering price. Note that investment dealers or other intermediaries may have their own rules about share transactions and may have earlier cut-off times than those of the fund. For more information about how to purchase through your intermediary, contact your intermediary directly. Prices that appear in the newspaper do not always indicate prices at which you will be purchasing and redeeming shares of the fund, since such prices generally reflect the previous day's closing price whereas purchases and redemptions are made at the next calculated price. The price you pay for shares, the offering price, is based on the net asset value per share which is calculated once daily as of approximately 4:00 p.m. New York time, which is the normal close of trading on the New York Stock Exchange, each day the Exchange is open. If, for example, the Exchange closes at 1:00 p.m., the fund's share price would still be determined as of 4:00 p.m. New York time. The New York Stock Exchange is currently closed on weekends and on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. Each share class of the fund has a separately calculated net asset value (and share price). All portfolio securities of funds managed by Capital Research and Management Company (other than money market funds) are valued, and the net asset values per share for each share class are determined, as follows: Fundamental Investors - Page 37 1. Equity securities, including depositary receipts, are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities are valued at prices obtained from an independent pricing service, when such prices are available; however, in circumstances where the investment adviser deems it appropriate to do so, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics (e.g., convertible bonds, preferred stocks, units comprised of more than one type of security, etc.), or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Securities with original maturities of one year or less having 60 days or less to maturity are amortized to maturity based on their cost if acquired within 60 days of maturity, or if already held on the 60th day, based on the value determined on the 61st day. Forward currency contracts are valued at the mean of representative quoted bid and asked prices. Assets or liabilities initially expressed in terms of non-U.S. currencies are translated prior to the next determination of the net asset value of the fund's shares into U.S. dollars at the prevailing market rates. Securities and assets for which market quotations are not readily available or are considered unreliable are valued at fair value as determined in good faith under policies approved by the fund's Board. Subject to Board oversight, the fund's Board has delegated the obligation to make fair valuation determinations to a Valuation Committee established by the fund's investment adviser. The Board receives regular reports describing fair-valued securities and the valuation methods used. The Valuation Committee has adopted guidelines and procedures (consistent with SEC rules and guidance) to ensure that certain basic principles and factors are considered when making all fair value determinations. As a general principle, securities lacking readily available market quotations, or that have quotations that are considered unreliable, are valued in good faith by the Valuation Committee based upon what the fund might reasonably expect to receive upon their current sale. The Valuation Committee considers all indications of value available to it in determining the "fair value" to be assigned to a particular security, including, without limitation, the type and cost of the security, contractual or legal restrictions on resale of the security, relevant financial or business developments of the issuer, actively traded similar or related securities, conversion or exchange rights on the security, related corporate actions, significant events occurring after the close of trading in the security and changes in overall market conditions. 2. Each class of shares represents interests in the same portfolio of investments and is otherwise identical in all respects to each other class, except for differences relating to distribution, service and other charges and expenses, certain voting rights, differences relating to eligible investors, the designation of each class of shares, conversion features and exchange privileges. Expenses attributable to the fund, but not to a particular class of shares, are borne by each class Fundamental Investors - Page 38 on the basis of the relative aggregate net assets of the classes. Expenses directly attributable to a class of shares are borne by that class of shares. Liabilities, including accruals of taxes and other expense items attributable to particular share classes, are deducted from total assets attributable to the respective share classes. 3. Net assets so obtained for each share class are then divided by the total number of shares outstanding of that share class, and the result, rounded to the nearer cent, is the net asset value per share for that share class. Any purchase order may be rejected by the Principal Underwriter or by the fund. The Principal Underwriter will not knowingly sell shares of the fund directly or indirectly to any person or entity, where, after the sale, such person or entity would own beneficially directly or indirectly more than 3.0% of the outstanding shares of the fund without the consent of a majority of the fund's Board. SELLING SHARES Shares are sold at the net asset value next determined after your request is received in good order by the Transfer Agent, dealer or any of their designees. Sales of certain Class A, B and C shares may be subject to a CDSC. Generally, Class F shares are only available to fee-based programs of investment firms that have special agreements with the fund's distributor and certain registered investment advisers. You may sell (redeem) other classes of shares in your account in any of the following ways: THROUGH YOUR DEALER (certain charges may apply) - Shares held for you in your dealer's street name must be sold through the dealer. WRITING TO AMERICAN FUNDS SERVICE COMPANY - Requests must be signed by the registered shareholder(s). - A signature guarantee is required if the redemption is: - Over $75,000; - Made payable to someone other than the registered shareholder(s); or - Sent to an address other than the address of record, or an address of record which has been changed within the last 10 days. Your signature may be guaranteed by a domestic stock exchange or the National Association of Securities Dealers, Inc., bank, savings association or credit union that is an eligible guarantor institution. The Transfer Agent reserves the right to require a signature guarantee on any redemptions. - Additional documentation may be required for sales of shares held in corporate, partnership or fiduciary accounts. Fundamental Investors - Page 39 - You must include with your written request any shares you wish to sell that are in certificate form. TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR USING THE INTERNET - Redemptions by telephone, fax or the Internet (including American FundsLine/(R)/ and American FundsLine OnLine/(R)/) are limited to $75,000 per shareholder each day. - Checks must be made payable to the registered shareholder(s). - Checks must be mailed to an address of record that has been used with the account for at least 10 days. MONEY MARKET FUNDS - You may have redemptions of $1,000 or more wired to your bank by writing American Funds Service Company. - You may establish check writing privileges using an account application. - If you request check writing privileges, you will be provided with checks that you may use to draw against your account. These checks may be made payable to anyone you designate and must be signed by the authorized number of registered shareholders exactly as indicated on your checking account signature card. - Check writing is not available for any of the 529 share classes or B, C or F share classes of The Cash Management Trust of America. If you sell Class A, B or C shares and request a specific dollar amount to be sold, we will sell sufficient shares so that the sale proceeds, after deducting any applicable CDSC, equals the dollar amount requested. Redemption proceeds will not be mailed until sufficient time has passed to provide reasonable assurance that checks or drafts (including certified or cashier's checks) for shares purchased have cleared (which may take up to 15 calendar days from the purchase date). Except for delays relating to clearance of checks for share purchases or in extraordinary circumstances (and as permissible under the 1940 Act), sale proceeds will be paid on or before the seventh day following receipt and acceptance of an order. Interest will not accrue or be paid on amounts that represent uncashed distribution or redemption checks. If you notify the Transfer Agent, you may reinvest proceeds from a redemption, dividend payment or capital gain distribution without a sales charge in any of the American Funds within 90 days after the date of the redemption or distribution. Proceeds from a Class B share redemption where a CDSC was charged will be reinvested in Class A shares. Proceeds from any other type of redemption and all dividend payments and capital gain distributions will be reinvested in the same share class from which the original redemption or distribution was made. Any CDSC on Class A or C shares will be credited to your account. Redemption proceeds of Class A shares representing direct purchases in the money market funds that are reinvested in non-money Fundamental Investors - Page 40 market funds will be subject to a sales charge. Proceeds will be reinvested at the next calculated net asset value after your request is received and accepted by the Transfer Agent. You may not reinvest proceeds in the American Funds as described in this paragraph if the reinvestment otherwise triggers a purchase block as described under "Frequent trading of fund shares." FREQUENT TRADING OF FUND SHARES -- As noted in the prospectus, beginning on January 12, 2005, certain redemptions may trigger a purchase block lasting 30 calendar days. The following transactions are exempt from this general purchase block policy: . Systematic redemptions (e.g., regular periodic automatic redemptions), where the entity maintaining the shareholder account is able to identify the transaction as a systematic redemption, will not result in future purchases being prevented. . Purchases (including purchases that are part of an exchange transaction) of shares having a value of less than $5,000 will not be prevented. . Systematic purchases (e.g., regular periodic automatic transactions, automatic reinvestments of dividends and capital gain distributions, and Statement of Intention escrow share redemptions), where the entity maintaining the shareholder account is able to identify the transaction as a systematic purchase, will not be prevented. . Purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations will not be prevented. OTHER POTENTIALLY ABUSIVE ACTIVITY -- In addition to implementing purchase blocks, American Funds Service Company will monitor for other types of activity that could potentially be harmful to the American Funds - for example, short-term trading activity in multiple funds. When identified, American Funds Service Company will request that the shareholder discontinue the activity. If the activity continues, American Funds Service Company will freeze the shareholder account to prevent all activity other than redemptions of fund shares. SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES The following services and privileges are generally available to all shareholders. However, certain services and privileges may not be available for Class 529 shareholders or if your account is held with an investment dealer. AUTOMATIC INVESTMENT PLAN - An automatic investment plan enables you to make monthly or quarterly investments in the American Funds through automatic debits from your bank account. To set up a plan, you must fill out an account application and specify the amount you would like to invest ($50 minimum) and the date on which you would like your investments to occur. The plan will begin within 30 days after your account application is received. Your bank account will be debited on the day or a few days before your investment is made, depending on the bank's capabilities. The Transfer Agent will then invest your money into the fund you specified on or around the date you specified. If the date you specified falls on a weekend or holiday, your money will be invested on the following business day. However, if the following business day falls in the next month, your money will be invested on the business day immediately preceding the weekend or holiday. If your bank account cannot be debited due to insufficient funds, a stop-payment or the closing of the account, the plan may be terminated and the related investment reversed. You may change the amount of the investment or discontinue the plan at any time by writing to the Transfer Agent. Fundamental Investors - Page 41 AUTOMATIC REINVESTMENT - Dividends and capital gain distributions are reinvested in additional shares of the same class and fund at net asset value unless you indicate otherwise on the account application. You also may elect to have dividends and/or capital gain distributions paid in cash by informing the fund, the Transfer Agent or your investment dealer. Dividends and capital gain distributions paid by the 529 share classes will be automatically reinvested. If you have elected to receive dividends and/or capital gain distributions in cash, and the postal or other delivery service is unable to deliver checks to your address of record, or you do not respond to mailings from American Funds Service Company with regard to uncashed distribution checks, your distribution option will automatically be converted to having all dividends and other distributions reinvested in additional shares. CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - For all share classes, except the 529 classes of shares, you may cross-reinvest dividends and capital gains ("distributions") of the same share class into other American Funds at net asset value, subject to the following conditions: (a) The aggregate value of your account(s) in the fund(s) paying distributions equals or exceeds $5,000 (this is waived if the value of the account in the fund receiving the distributions equals or exceeds that fund's minimum initial investment requirement), (b) If the value of the account of the fund receiving distributions is below the minimum initial investment requirement, distributions must be automatically reinvested, (c) If you discontinue the cross-reinvestment of distributions, the value of the account of the fund receiving distributions must equal or exceed the minimum initial investment requirement. If you do not meet this requirement within 90 days of notification, the fund has the right to automatically redeem the account. EXCHANGE PRIVILEGE - You may only exchange shares into other American Funds within the same class. However, exchanges from Class A shares of The Cash Management Trust of America may be made to Class B or C shares of other American Funds for dollar cost averaging purposes. Exchange purchases are subject to the minimum investment requirements of the fund purchased and no sales charge generally applies. However, exchanges of shares from American Funds money market funds are subject to applicable sales charges on the fund being purchased, unless the money market fund shares were acquired by an exchange from a fund having a sales charge, or by reinvestment or cross-reinvestment of dividends or capital gain distributions. Exchanges of Class F shares generally may only be done through fee-based programs of investment firms that have special agreements with the fund's distributor and certain registered investment advisers. Exchanges from Class A, C or F shares to the corresponding 529 share class, particularly in the case of Uniform Gifts to Minors Act or Uniform Transfer to Minors Act custodial accounts, may result in significant legal and tax consequences as described in the CollegeAmerica Program Description. Please consult your financial adviser prior to making such an exchange. You may exchange shares of other classes by writing to the Transfer Agent (see "Selling Shares" above), by contacting your investment dealer or financial adviser, by using American FundsLine and American FundsLine OnLine (see "American FundsLine and American FundsLine OnLine" below), or by telephoning 800/421-0180 toll-free, faxing (see "American Funds Service Company Fundamental Investors - Page 42 Service Areas" in the prospectus for the appropriate fax numbers) or telegraphing the Transfer Agent. For more information, see "Telephone and Internet Purchases, Redemptions and Exchanges" below. Shares held in corporate-type retirement plans for which Capital Bank and Trust Company serves as trustee may not be exchanged by telephone, Internet, fax or telegraph. Exchange redemptions and purchases are processed simultaneously at the share prices next determined after the exchange order is received (see "Price of Shares" above). THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES AS ORDINARY SALES AND PURCHASES. AUTOMATIC EXCHANGES - For all share classes, you may automatically exchange shares of the same class in amounts of $50 or more among any of the American Funds on any day (or preceding business day if the day falls on a non-business day) of each month you designate. AUTOMATIC WITHDRAWALS - For all share classes, except the 529 classes of shares, you may automatically withdraw shares from any of the American Funds. You can make automatic withdrawals of $50 or more as often as you wish if your account is worth at least $10,000, or up to four times a year for an account worth at least $5,000. You can designate the day of each period for withdrawals and request that checks be sent to you or someone else. Withdrawals may also be electronically deposited to your bank account. The Transfer Agent will withdraw your money from the fund you specify on or around the date you specify. If the date you specified falls on a weekend or holiday, the redemption will take place on the previous business day. However, if the previous business day falls in the preceding month, the redemption will take place on the following business day after the weekend or holiday. Withdrawal payments are not to be considered as dividends, yield or income. Automatic investments may not be made into a shareholder account from which there are automatic withdrawals. Withdrawals of amounts exceeding reinvested dividends and distributions and increases in share value would reduce the aggregate value of the shareholder's account. The Transfer Agent arranges for the redemption by the fund of sufficient shares, deposited by the shareholder with the Transfer Agent, to provide the withdrawal payment specified. ACCOUNT STATEMENTS - Your account is opened in accordance with your registration instructions. Transactions in the account, such as additional investments, will be reflected on regular confirmation statements from the Transfer Agent. Dividend and capital gain reinvestments, purchases through automatic investment plans and certain retirement plans, as well as automatic exchanges and withdrawals will be confirmed at least quarterly. AMERICAN FUNDSLINE AND AMERICAN FUNDSLINE ONLINE - You may check your share balance, the price of your shares, or your most recent account transaction, redeem shares (up to $75,000 per American Funds shareholder each day) from non-retirement plan accounts, or exchange shares around the clock with American FundsLine and American FundsLine OnLine. To use these services, call 800/325-3590 from a TouchTone(TM) telephone or access the American Funds website on the Internet at americanfunds.com. Redemptions and exchanges through American FundsLine and American FundsLine OnLine are subject to the conditions noted above and in "Telephone and Internet Purchases, Redemptions and Exchanges" below. You will need your fund number (see the list of the American Funds under "Purchase of Shares - Fund Numbers"), personal identification number (generally the last four digits of your Social Security number or other tax identification number associated with your account) and account number. TELEPHONE AND INTERNET PURCHASES, REDEMPTIONS AND EXCHANGES - By using the telephone (including American FundsLine) or the Internet (including American FundsLine OnLine), fax or Fundamental Investors - Page 43 telegraph purchase, redemption and/or exchange options, you agree to hold the fund, the Transfer Agent, any of its affiliates or mutual funds managed by such affiliates, and each of their respective directors, trustees, officers, employees and agents harmless from any losses, expenses, costs or liability (including attorney fees) which may be incurred in connection with the exercise of these privileges. Generally, all shareholders are automatically eligible to use these options. However, you may elect to opt out of these options by writing the Transfer Agent (you may also reinstate them at any time by writing the Transfer Agent). If the Transfer Agent does not employ reasonable procedures to confirm that the instructions received from any person with appropriate account information are genuine, it and/or the fund may be liable for losses due to unauthorized or fraudulent instructions. In the event that shareholders are unable to reach the fund by telephone because of technical difficulties, market conditions, or a natural disaster, redemption and exchange requests may be made in writing only. REDEMPTION OF SHARES - The fund's Articles of Incorporation permit the fund to direct the Transfer Agent to redeem the shares of any shareholder for their then current net asset value per share if at such time the shareholder of record owns shares having an aggregate net asset value of less than the minimum initial investment amount required of new shareholders as set forth in the fund's current registration statement under the 1940 Act, and subject to such further terms and conditions as the Board of Directors of the fund may from time to time adopt. While payment of redemptions normally will be in cash, the fund's Articles of Incorporation permit payment of the redemption price wholly or partly in securities or other property included in the assets belonging to the fund when in the opinion of the fund's Board of Directors, which shall be conclusive, conditions exist which make payment wholly in cash unwise or undesirable. SHARE CERTIFICATES - Shares are credited to your account and certificates are not issued unless you request them by writing to the Transfer Agent. Certificates are not available for the 529 share classes. EXECUTION OF PORTFOLIO TRANSACTIONS The investment adviser places orders with broker-dealers for the fund's portfolio transactions. The investment adviser strives to obtain best execution on the fund's portfolio transactions, taking into account a variety of factors to produce the most favorable total price reasonably attainable under the circumstances. These factors include the size and type of transaction, the cost and quality of executions, and the broker-dealer's ability to offer liquidity and anonymity. The fund does not consider the investment adviser as having an obligation to obtain the lowest available commission rate to the exclusion of price, service and qualitative considerations. Subject to the considerations outlined above, the investment adviser may place orders for the fund's portfolio transactions with broker-dealers who have sold shares of the funds managed by the investment adviser, or who have provided investment research, statistical or other related services to the investment adviser. In placing orders for the fund's portfolio transactions, the investment adviser does not commit to any specific amount of business with any particular broker-dealer. Further, when the investment adviser places orders for the fund's portfolio transactions, it does not give any consideration to whether a broker-dealer has sold shares of the funds managed by the investment adviser. The investment adviser may, however, give consideration to investment research, statistical or other related services provided to the adviser in placing orders for the fund's portfolio transactions. Fundamental Investors - Page 44 Portfolio transactions for the fund may be executed as part of concurrent authorizations to purchase or sell the same security for other funds served by the investment adviser, or for trusts or other accounts served by affiliated companies of the investment adviser. When such concurrent authorizations occur, the objective is to allocate the executions in an equitable manner. Brokerage commissions paid on portfolio transactions, including investment dealer concessions on underwritings, if applicable, for the fiscal years ended 2003, 2002 and 2001, amounted to $16,389,000, $22,067,000 and $22,124,000. The decrease in brokerage commissions in 2003 is principally due to a decrease in portfolio transactions. The fund is required to disclose information regarding investments in the securities of its "regular" broker-dealers (or parent companies of its regular broker-dealers) that derive more than 15% of their revenue from broker-dealer, underwriter or investment adviser activities. A regular broker-dealer is: (1) one of the 10 broker-dealers that received from the fund the largest amount of brokerage commissions by participating, directly or indirectly, in the fund's portfolio transactions during the fund's most recent fiscal year; (2) one of the 10 broker-dealers that engaged as principal in the largest dollar amount of portfolio transactions of the fund during the fund's most recent fiscal year; or (3) one of the 10 broker-dealers that sold the largest amount of securities of the fund during the fund's most recent fiscal year. At the end of the fund's most recent fiscal year, the fund held equity securities of JP Morgan Chase & Co. in the amount of $282,270,000 and Bank of America Corp. in the amount of $56,172,000. GENERAL INFORMATION CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds from the sale of shares of the fund and of securities in the fund's portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110, as Custodian. If the fund holds non-U.S. securities, the Custodian may hold these securities pursuant to sub-custodial arrangements in non-U.S. banks or non-U.S. branches of U.S. banks. TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of the investment adviser, maintains the records of shareholder accounts, processes purchases and redemptions of the fund's shares, acts as dividend and capital gain distribution disbursing agent, and performs other related shareholder service functions. The principal office of American Funds Service Company is located at 135 South State College Boulevard, Brea, CA 92821-5823. American Funds Service Company was paid a fee of $19,207,000 for Class A shares and $919,000 for Class B shares for the 2003 fiscal year. In the case of certain shareholder accounts, third parties who may be unaffiliated with the investment adviser provide transfer agency and shareholder services in place of American Funds Service Company. These services are rendered under agreements with American Funds Service Company or its affiliates and the third parties receive compensation according to such agreements. Compensation for transfer agency and shareholder services, whether paid to American Funds Service Company or such third parties, is ultimately paid from fund assets and is reflected in the expenses of the fund as disclosed in the prospectus. INDEPENDENT AUDITORS - Deloitte & Touche LLP, Two California Plaza, 350 South Grand Avenue, Suite 200, Los Angeles, CA 90071, serves as the fund's independent auditors, providing audit services, preparation of tax returns and review of certain documents to be filed with the Fundamental Investors - Page 45 Securities and Exchange Commission. The financial statements included in this Statement of Additional Information from the Annual Report have been so included in reliance on the report of Deloitte & Touche LLP, independent auditors, given on the authority of said firm as experts in accounting and auditing. The selection of the fund's independent auditors is reviewed and determined annually by the Board of Directors. INDEPENDENT LEGAL COUNSEL - Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, Los Angeles, CA 90071, currently serves as counsel for the fund and for Directors who are not interested persons (as defined by the 1940 Act) of the fund in their capacities as such. Certain legal matters in connection with the capital shares offered by the prospectus have been passed upon for the fund by Paul, Hastings, Janofsky & Walker LLP. Counsel does not currently provide legal services to the fund's investment adviser or any of its affiliated companies. A determination with respect to the independence of the fund's "independent legal counsel" will be made at least annually by the independent Directors of the fund, as prescribed by the 1940 Act and the related rules. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS - The fund's fiscal year ends on December 31. Shareholders are provided updated prospectuses annually and at least semiannually with reports showing the investment portfolio, financial statements and other information. The fund's annual financial statements are audited by the fund's independent auditors, Deloitte & Touche LLP. In addition, shareholders may also receive proxy statements for the fund. In an effort to reduce the volume of mail shareholders receive from the fund when a household owns more than one account, the Transfer Agent has taken steps to eliminate duplicate mailings of prospectuses, shareholder reports and proxy statements. To receive additional copies of a prospectus, report or proxy statement, shareholders should contact the Transfer Agent. CODES OF ETHICS - The fund and Capital Research and Management Company and its affiliated companies, including the fund's principal underwriter, have adopted codes of ethics which allow for personal investments, including securities in which the fund may invest from time to time. These codes include: a ban on acquisitions of securities pursuant to an initial public offering; restrictions on acquisitions of private placement securities; pre-clearance and reporting requirements; review of duplicate confirmation statements; annual recertification of compliance with codes of ethics; blackout periods on personal investing for certain investment personnel; ban on short-term trading profits for investment personnel; limitations on service as a director of publicly traded companies; and disclosure of personal securities transactions. PROXY VOTING PROCEDURES AND GUIDELINES - The investment adviser has adopted Proxy Voting Guidelines (the "Guidelines") with respect to voting proxies of securities held by the American Funds, Endowments and American Funds Insurance Series. Certain funds, including the fund, have established separate proxy committees that vote proxies or delegate to a voting officer the authority to vote on behalf of those funds. Proxies for all other funds are voted by an investment committee of the investment adviser under authority delegated by the funds' Boards. Therefore, if more than one fund invests in the same company, they may vote differently on the same proposal. All U.S. proxies are voted. Non-U.S. proxies also are voted, provided there is sufficient time and information available. After a proxy is received, the investment adviser prepares a summary of the proposals in the proxy. A discussion of any potential conflicts of interest is also included in the summary. After reviewing the summary, one or more research analysts familiar with the company Fundamental Investors - Page 46 and industry make a voting recommendation on the proxy proposals. A second recommendation is made by a proxy coordinator (a senior investment professional) based on the individual's knowledge of the Guidelines and familiarity with proxy-related issues. The proxy summary and voting recommendations are then sent to the appropriate proxy voting committee for the final voting decision. The analyst and proxy coordinator making voting recommendations are responsible for noting any potential material conflicts of interest. One example might be where a director of one or more American Funds is also a director of a company whose proxy is being voted. In such instances, proxy committee members are alerted to the potential conflict. The proxy committee may then elect to vote the proxy or seek a third-party recommendation or vote of an ad hoc group of committee members. The Guidelines, which have been in effect in substantially their current form for many years, provide an important framework for analysis and decision-making by all funds; however, they are not exhaustive and do not address all potential issues. The Guidelines provide a certain amount of flexibility so that all relevant facts and circumstances can be considered in connection with every vote. As a result, each proxy received is voted on a case-by-case basis considering the specific circumstances of each proposal. The voting process reflects the funds' understanding of the company's business, its management and its relationship with shareholders over time. Beginning August 31, 2004 (and each August 31 thereafter) each fund will be required to file Form N-PX containing its complete voting record for the 12 months ended the preceding June 30. Once filed, the most recent Form N-PX will be available (i) without charge, upon request, by calling American Funds Service Company at 800/421-0180, and (ii) on the SEC's website at www.sec.gov. The following summary sets forth the general positions of the American Funds, Endowments, American Funds Insurance Series and the investment adviser on various proposals. A copy of the full Guidelines is available upon request, free of charge, by calling American Funds Service Company at 800/421-0180 or visiting the American Funds website at americanfunds.com. DIRECTOR MATTERS - The election of a company's slate of nominees for director is generally supported. Votes may be withheld for some or all of the nominees if this is determined to be in the best interest of shareholders. Separation of the Chairman and CEO positions may also be supported. Typically, proposals to declassify the board (elect all directors annually) are supported based on the belief that this increases the directors' sense of accountability to shareholders. SHAREHOLDER RIGHTS - Proposals to repeal an existing poison pill, to provide for confidential voting and to provide for cumulative voting are usually supported. Proposals to eliminate the right of shareholders to act by written consent or to take away a shareholder's right to call a special meeting are not typically supported. COMPENSATION AND BENEFIT PLANS - Option plans are complicated, and many factors are considered in evaluating a plan. Each plan is evaluated based on protecting shareholder interests and a knowledge of the company and its management. Considerations include the pricing (or repricing) of options awarded under the plan and the impact of dilution on existing shareholders from past and future equity awards. Compensation packages Fundamental Investors - Page 47 should be structured to attract, motivate and retain existing employees and qualified directors; however, they should not be excessive. ROUTINE MATTERS - The ratification of auditors, procedural matters relating to the annual meeting, and changes to company name are examples of items considered routine. Such items are generally voted in favor of management's recommendations unless circumstances indicate otherwise. OTHER INFORMATION - The financial statements including the investment portfolio and the report of Independent Auditors contained in the Annual Report are included in this Statement of Additional Information. The following information is not included in the Annual Report: DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM OFFERING PRICE PER SHARE FOR CLASS A SHARES - DECEMBER 31, 2003
Net asset value and redemption price per share (Net assets divided by shares outstanding). . $28.85 Maximum offering price per share (100/94.25 of net asset value per share, which takes into account the fund's current maximum sales charge). . . . . . . . . . . . . . . . $30.61
Fundamental Investors - Page 48 APPENDIX The following descriptions of debt security ratings are based on information provided by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("Standard & Poor's"). DESCRIPTION OF BOND RATINGS MOODY'S LONG-TERM RATING DEFINITIONS Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. A Obligations rated A are considered upper-medium grade and are subject to low credit risk. Baa Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. B Obligations rated B are considered speculative and are subject to high credit risk. Caa Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. NOTE: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Fundamental Investors - Page 49 STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS AAA An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB, B, CCC, CC, AND C Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC An obligation rated CC is currently highly vulnerable to nonpayment. Fundamental Investors - Page 50 C The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. D An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Fundamental Investors - Page 51 INVESTMENT PORTFOLIO, December 31, 2003 [begin pie chart] Percent of INDUSTRY DIVERSIFICATION Net Assets Equity securities 94.92 % Oil & Gas 8.70 Metals & Mining 5.90 Aerospace & Defense 5.08 Pharmaceuticals 5.05 Commercial Banks 4.98 Other industries 65.21 Bonds & notes 1.16 Cash & equivalents 3.92 [end pie chart] Percent of net LARGEST EQUITY HOLDINGS assets Dow Chemical 2.67 % Suncor Energy 2.12 Altria Group 2.07 Time Warner 2.02 Norsk Hydro 1.89 FleetBoston Financial 1.86 Deere 1.84 Microsoft 1.76 Alcoa 1.64 SBC Communications 1.61
Shares or Market value EQUITY SECURITIES (COMMON AND PREFERRED STOCKS AND CONVERTIBLE DEBENTURES) - 94.92% principal amount (000) OIL & GAS - 8.70% Suncor Energy Inc. (Canada) 17,903,010 $ 449,165 Norsk Hydro AS (ADR) (Norway) 3,559,000 219,946 Norsk Hydro AS 2,934,600 180,130 LUKoil Holding (ADR) (Russia) 2,250,000 209,475 Murphy Oil Corp. 2,370,000 154,785 Shell Canada Ltd. (Canada) 3,273,200 154,766 ConocoPhillips 1,700,000 111,469 Unocal Corp. 1,900,000 69,977 Unocal Capital Trust 6.25% convertible preferred 2026 $ 450,000 22,950 ChevronTexaco Corp. 1,000,000 86,390 Burlington Resources Inc. 1,000,000 55,380 Imperial Oil Ltd. (Canada) 1,184,778 52,628 Royal Dutch Petroleum Co., New York registered (Netherlands) 875,000 45,841 Exxon Mobil Corp. 750,000 30,750 METALS & MINING - 5.90% Alcoa Inc. 9,173,800 348,604 BHP Billiton Ltd. (Australia) 23,945,030 219,501 Freeport-McMoRan Copper & Gold Inc., Class B 4,973,100 209,517 Rio Tinto PLC (United Kingdom) 6,500,000 178,866 CONSOL Energy Inc. (1) (2) 3,700,000 86,247 Phelps Dodge Corp. (3) 965,620 73,474 Inco Ltd. (Canada) (3) 1,632,300 64,998 Massey Energy Co. 2,011,700 41,843 Arch Coal, Inc. 5.00% convertible preferred 2049 $ 200,000 17,068 BlueScope Steel Ltd. (formerly BHP Steel Ltd.) (Australia) 2,113,020 8,898 AEROSPACE & DEFENSE - 5.08% Boeing Co. 7,350,000 309,729 Raytheon Co. 7,592,732 228,086 Raytheon Co. - RC Trust I 8.25% convertible preferred 2006 1,180,000 units 64,050 Northrop Grumman Corp. 1,150,000 109,940 Northrop Grumman Corp. 7.25% convertible preferred 2004 572,690 units 59,388 General Dynamics Corp. 1,772,900 160,252 Honeywell International Inc. 1,500,000 50,145 United Technologies Corp. 525,000 49,754 Bombardier Inc., Class B (Canada) 7,500,000 31,670 Lockheed Martin Corp. 248,200 12,757 PHARMACEUTICALS - 5.05% AstraZeneca PLC (Sweden) 2,660,000 129,399 AstraZeneca PLC (United Kingdom) 2,000,000 95,590 AstraZeneca PLC (ADR) 1,676,266 81,098 Sanofi-Synthelabo (France) 2,850,000 213,566 Eli Lilly and Co. 2,850,000 200,440 Bristol-Myers Squibb Co. 4,350,000 124,410 Merck & Co., Inc. 1,700,000 78,540 Schering-Plough Corp. 3,900,000 67,821 Forest Laboratories, Inc. (3) 700,000 43,260 Pfizer Inc 1,000,000 35,330 COMMERCIAL BANKS - 4.98% FleetBoston Financial Corp. 9,030,000 394,160 Allied Irish Banks, PLC (Ireland) 12,170,334 194,466 Cullen/Frost Bankers, Inc. 2,550,000 103,453 KeyCorp 3,100,000 90,892 Bank of Ireland (Ireland) 6,500,000 88,278 Bank of America Corp. 698,400 56,172 National Bank of Canada (Canada) 1,405,000 46,790 Comerica Inc. 800,000 44,848 St. George Bank Ltd. (Australia) 2,450,279 35,931 DIVERSIFIED TELECOMMUNICATION SERVICES - 4.33% SBC Communications Inc. 13,050,000 340,213 China Telecom Corp. Ltd., Class H (China) 400,000,000 164,895 Verizon Communications Inc. 4,615,000 161,894 Telecom Italia SpA, nonvoting (Italy) (3) 34,200,000 69,328 Deutsche Telekom AG (Germany) (3) 2,300,000 41,890 Deutsche Telekom International Finance BV 6.50% convertible bonds 2006 Euro 12,000,000 17,612 Swisscom AG (Switzerland) $ 167,510 55,041 Telefonica, SA (Spain) (3) 2,950,000 43,101 AT&T Corp. 800,000 16,240 Sprint Corp. - FON Group 400,000 6,568 MEDIA - 4.29% Time Warner Inc. (formerly AOL Time Warner Inc.) (3) 23,815,000 428,432 News Corp. Ltd., preferred (ADR) (Australia) 8,610,000 260,452 Comcast Corp., Class A (3) 2,825,500 92,874 Comcast Corp., Class A, special nonvoting stock (3) 500,000 15,640 Dow Jones & Co., Inc. 1,800,000 89,730 Liberty Media Corp., Class A (3) 915,000 10,879 Interpublic Group of Companies, Inc. 1.87% convertible subordinated notes 2006 (1) $ 8,168,000 7,576 UnitedGlobalCom, Inc., Class A (1) (2) (3) 225,035 1,717 Antena 3 Television, SA (Spain) (3) 9,979 438 CHEMICALS - 4.17% Dow Chemical Co. 13,625,000 566,391 E.I. du Pont de Nemours and Co. 3,000,000 137,670 Shin-Etsu Chemical Co., Ltd. (Japan) 1,940,000 79,110 Air Products and Chemicals, Inc. 1,300,000 68,679 Lyondell Chemical Co. 1,450,000 24,577 Potash Corp. of Saskatchewan Inc. (Canada) 69,200 5,984 MACHINERY - 4.16% Deere & Co. 5,971,100 388,420 Caterpillar Inc. 2,600,000 215,852 Parker Hannifin Corp. 2,600,000 154,700 Eaton Corp. 850,000 91,783 Illinois Tool Works Inc. 357,200 29,973 INSURANCE - 3.81% American International Group, Inc. 3,800,000 251,864 Allstate Corp. 3,500,000 150,570 XL Capital Ltd., Class A 1,825,000 141,529 Irish Life & Permanent PLC (Ireland) 7,000,000 112,466 Chubb Corp. 7.00% convertible preferred 2005 1,200,000 units 34,272 Chubb Corp. 300,000 20,430 Aon Corp. 1,767,400 42,312 St. Paul Companies, Inc. 700,000 27,755 21st Century Insurance Group 1,808,900 24,872 PAPER & FOREST PRODUCTS - 2.98% International Paper Co. 5,275,000 227,405 Weyerhaeuser Co. 2,883,000 184,512 Norske Skogindustrier ASA, Class A (Norway) 6,566,900 124,706 Oji Paper Co., Ltd. (Japan) 6,500,000 41,877 Bowater Inc. 700,000 32,417 Georgia-Pacific Corp., Georgia-Pacific Group 698,640 21,427 INDUSTRIAL CONGLOMERATES - 2.98% General Electric Co. 9,150,000 283,467 3M Co. 2,500,000 212,575 Tyco International Ltd. 5,125,000 135,813 SPECIALTY RETAIL - 2.57% Lowe's Companies, Inc. 5,524,900 306,024 Limited Brands, Inc. 13,200,000 237,996 ELECTRIC UTILITIES - 2.31% Dominion Resources, Inc. 4,590,000 292,980 DTE Energy Co. 1,606,900 63,312 American Electric Power Co., Inc. 1,902,100 58,033 TXU Corp. 1,167,200 27,686 FirstEnergy Corp. 569,200 20,036 E.ON AG (Germany) 300,000 19,483 Entergy Corp. 150,000 8,570 MULTI-UTILITIES & UNREGULATED POWER - 2.15% Duke Energy Corp. 10,275,000 210,124 Questar Corp. 3,000,000 105,450 Public Service Enterprise Group Inc. 1,480,000 64,824 Constellation Energy Group, Inc. 1,500,000 58,740 El Paso Corp. 2,100,000 17,199 COMPUTERS & PERIPHERALS - 2.14% International Business Machines Corp. 2,225,000 206,213 Sun Microsystems, Inc. (3) 21,000,000 94,290 NEC Corp. (Japan) 11,516,000 84,593 Hewlett-Packard Co. 3,000,000 68,910 TOBACCO - 2.07% Altria Group, Inc. 8,050,000 438,081 FOOD PRODUCTS - 1.94% Unilever NV, New York registered (Netherlands) 4,100,000 266,090 Sara Lee Corp. 3,375,000 73,271 General Mills, Inc. 1,404,200 63,610 Kraft Foods Inc., Class A 200,000 6,444 H.J. Heinz Co. 70,000 2,550 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.89% Texas Instruments Inc. 11,353,424 333,564 Maxim Integrated Products, Inc. 701,600 34,940 Linear Technology Corp. 500,000 21,035 ASML Holding NV 5.50% convertible notes 2010 Euro 6,000,000 10,760 ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.88% Sanmina Corp. 0% convertible subordinated debentures 2020 $ 166,000,000 85,075 SCI Systems, Inc. 3.00% convertible subordinated debentures 2007 $ 54,500,000 51,775 Agilent Technologies, Inc. (3) 3,700,000 108,188 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (4) $ 15,074,000 16,544 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (1) (4) $ 10,370,000 11,381 Hitachi, Ltd. (Japan) 14,824,000 89,157 Solectron Corp. 7.25% ACES convertible preferred 2004 1,200,000 units 20,016 Murata Manufacturing Co., Ltd. (Japan) 300,000 16,172 SOFTWARE - 1.76% Microsoft Corp. 13,565,000 373,580 IT SERVICES - 1.59% Automatic Data Processing, Inc. 5,375,000 212,904 Sabre Holdings Corp., Class A 2,645,304 57,112 Electronic Data Systems Corp. 1,400,000 34,356 Electronic Data Systems Corp. 7.625% FELINE PRIDES 2004 279,600 units 6,411 Ceridian Corp. (3) 1,200,000 25,128 COMMUNICATIONS EQUIPMENT - 1.57% Cisco Systems, Inc. (3) 7,000,000 170,030 Motorola, Inc. 8,000,000 112,560 Motorola, Inc. 7.00% convertible preferred 2004 800,000 units 34,744 Corning Inc. (3) 1,520,000 15,854 AUTOMOBILES - 1.41% Toyota Motor Corp. (Japan) 6,000,000 202,216 General Motors Corp. 1,800,000 96,120 ENERGY EQUIPMENT & SERVICES - 1.41% Halliburton Co. 7,500,000 195,000 Baker Hughes Inc. 3,200,000 102,912 CAPITAL MARKETS - 1.33% J.P. Morgan Chase & Co. 7,685,000 282,270 ELECTRICAL EQUIPMENT - 1.31% Emerson Electric Co. 4,300,000 278,425 MULTILINE RETAIL - 1.30% Target Corp. 4,890,000 187,776 May Department Stores Co. 3,000,000 87,210 BEVERAGES - 1.18% Anheuser-Busch Companies, Inc. 1,700,000 89,556 PepsiCo, Inc. 1,800,000 83,916 Coca-Cola Co. 1,500,000 76,125 THRIFTS & MORTGAGE FINANCE - 0.97% Fannie Mae 2,117,800 158,962 Independence Community Bank Corp. 1,295,900 46,614 CONTAINERS & PACKAGING - 0.81% Temple-Inland Inc. (5) 2,750,000 172,343 ROAD & RAIL - 0.81% Union Pacific Corp. 1,500,000 104,220 Burlington Northern Santa Fe Corp. 2,100,000 67,935 FOOD & STAPLES RETAILING - 0.61% Walgreen Co. 3,345,000 121,691 SYSCO Corp. 200,000 7,446 AUTO COMPONENTS - 0.57% Magna International Inc., Class A (Canada) 1,000,000 80,050 Dana Corp. 2,215,300 40,651 GAS UTILITIES - 0.57% NiSource Inc. 2,800,000 61,432 KeySpan Corp. 1,584,000 58,291 AIR FREIGHT & LOGISTICS - 0.53% United Parcel Service, Inc., Class B 1,500,000 111,825 REAL ESTATE - 0.46% Equity Residential 2,850,000 84,104 MI Developments Inc., Class A (Canada) (3) 500,000 13,960 HEALTH CARE PROVIDERS & SERVICES - 0.40% HCA Inc. 1,000,000 42,960 CIGNA Corp. 725,000 41,688 WIRELESS TELECOMMUNICATION SERVICES - 0.35% Vodafone Group PLC (United Kingdom) 30,175,000 74,533 AIRLINES - 0.32% Continental Airlines, Inc., Class B (3) 2,675,000 43,522 Southwest Airlines Co. 1,500,000 24,210 OTHER - 0.41% Amgen Inc. (3) 500,000 30,900 Allied Waste Industries, Inc., Series C, 6.25% convertible preferred 2006 $ 360,000 27,540 InterActiveCorp (3) 456,000 15,472 Avon Products, Inc. 170,000 11,473 Colgate-Palmolive Co. 10,000 501 MISCELLANEOUS - 1.87% Other equity securities in initial period of acquisition 396,852 TOTAL EQUITY SECURITIES (cost: $16,872,105,000) 20,107,307 Principal amount BONDS & NOTES - 1.16% (000) AIRLINES - 0.75% Northwest Airlines, Inc.: 8.875% 2006 $ 58,185 53,094 7.625% 2005 37,860 37,103 9.875% 2007 15,335 14,032 7.875% 2008 16,566 13,874 8.52% 2004 5,000 5,050 Continental Airlines, Inc. 8.00% 2005 28,600 27,956 Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 (6) 11,500 8,740 MEDIA - 0.26% Charter Communications Holdings, LLC 8.25% 2007 50,000 47,250 Time Warner Inc. 10.15% 2012 6,000 8,021 DIVERSIFIED TELECOMMUNICATION SERVICES - 0.15% Comcast UK Cable Partners Ltd. 11.20% 2007 19,570 19,864 AT&T Corp. 6.50% 2006 (1) (4) Euro 8,950 12,048 TOTAL BONDS & NOTES (cost: $226,029,000) 247,032 SHORT-TERM SECURITIES - 3.82% CORPORATE SHORT-TERM NOTES - 3.15% CAFCO, LLC 1.07%-1.09% due 1/22-1/28/2004 (1) $ 79,700 79,641 Coca-Cola Co. 1.01%-1.03% due 1/26-3/5/2004 72,000 71,918 Park Avenue Receivables Corp. 1.08%-1.09% due 1/9-1/29/2004 (1) 60,999 60,971 Procter & Gamble Co. 1.02%-1.05% due 1/9-2/9/2004 (1) 55,000 54,959 Pfizer Inc 1.02%-1.03% due 1/16-1/28/2004 (1) 54,200 54,170 Receivables Capital Corp. 1.07%-1.08% due 1/20-2/3/2004 (1) 50,000 49,958 Edison Asset Securitization LLC 1.07%-1.08% due 1/8-2/17/2004 (1) 49,100 49,044 Preferred Receivables Funding Corp. 1.08% due 1/29-2/5/2004 (1) 47,611 47,568 E.I. DuPont de Nemours & Co. 1.04%-1.05% due 1/23-1/27/2004 45,000 44,966 BellSouth Corp. 1.01%-1.03% due 1/7-1/21/2004 (1) 35,200 35,187 Netjets Inc. 1.06%-1.07% due 1/12-2/10/2004 (1) 33,600 33,575 Verizon Network Funding Corp. 1.02%-1.03% due 1/22-2/11/2004 25,000 24,979 Merck & Co. Inc. 1.01% due 1/20/2004 21,018 21,006 Caterpillar Financial Serivces Corp. 1.01% due 3/4/2004 20,000 19,964 Harley-Davidson Funding Corp. 1.01%-1.05% due 1/2-1/15/2004 (1) 14,500 14,496 Johnson Controls Inc. 0.94% due 1/2/2004 (1) 5,000 5,000 U.S. TREASURIES - 0.34% U.S. Treasury Bills 0.87%-0.93% due 2/12-2/19/2004 72,100 72,026 CERTIFICATES OF DEPOSIT - 0.18% Wells Fargo & Co. 1.04%-1.07% due 1/9-1/13/2004 38,000 38,000 FEDERAL AGENCY DISCOUNT NOTES - 0.15% International Bank for Reconstruction and Development 1.01% due 2/6/2004 26,100 26,073 Student Loan Marketing Assn. 1.00% due 1/13/2004 5,300 5,298 TOTAL SHORT-TERM SECURITIES (cost: $808,795,000) 808,799 TOTAL INVESTMENT SECURITIES (cost: $17,906,929,000) 21,163,138 OTHER ASSETS LESS LIABILITIES 20,899 NET ASSETS $21,184,037
(1) Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. (2) Valued under fair value procedures adopted by authority of the Board of Directors. (3) Security did not produce income during the last 12 months. (4) Coupon rate may change periodically. (5) The fund owns 5.07% of the outstanding voting securities of Temple-Inland Inc., and thus is considered an affiliate of this company under the Investment Company Act of 1940. (6) Pass-through security backed by a pool of mortgages or other loans on which principal payments are periodically made. Therefore, the effective maturity is shorter than the stated maturity. ADR = American Depositary Receipts See Notes to Financial Statements FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (dollars and shares in thousands, at December 31, 2003 except per-share amounts) ASSETS: Investment securities at market: Unaffiliated issuers (cost: $17,786,564) $20,990,795 Affiliated issuers (cost: $120,365) 172,343 $21,163,138 Cash 184 Receivables for: Sales of investments 10,918 Sales of fund's shares 28,061 Dividends and interest 39,234 78,213 21,241,535 LIABILITIES: Payables for: Purchases of investments 12,832 Repurchases of fund's shares 32,289 Investment advisory services 4,711 Services provided by affiliates 6,294 Deferred Directors' compensation 1,145 Other fees and expenses 227 57,498 NET ASSETS AT DECEMBER 31, 2003 $21,184,037 NET ASSETS CONSIST OF: Capital paid in on shares of capital stock $19,291,562 Undistributed net investment income 65,000 Accumulated net realized loss (1,429,024) Net unrealized appreciation 3,256,499 NET ASSETS AT DECEMBER 31, 2003 $21,184,037
TOTAL AUTHORIZED CAPITAL STOCK - 1,000,000 SHARES, $1.00 PAR VALUE Net asset Net assets Shares outstanding value per share (1) Class A $19,211,574 665,890 $28.85 Class B 836,257 29,039 28.80 Class C 413,527 14,371 28.78 Class F 310,658 10,771 28.84 Class 529-A 88,073 3,054 28.84 Class 529-B 18,648 647 28.83 Class 529-C 26,786 929 28.83 Class 529-E 4,447 154 28.83 Class 529-F 1,116 39 28.82 Class R-1 2,122 74 28.79 Class R-2 45,068 1,566 28.77 Class R-3 65,698 2,280 28.82 Class R-4 47,539 1,649 28.83 Class R-5 112,524 3,899 28.86 (1) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for classes A and 529-A, for which the maximum offering prices per share were $30.61 and $30.60, respectively.
See Notes to Financial Statements STATEMENT OF OPERATIONS for the year ended December 31, 2003 (dollars in thousands) INVESTMENT INCOME: Income: Dividends (net of non-U.S. withholding tax of $8,769; also includes $3,485 from affiliates) $409,558 Interest 73,821 $483,379 Fees and expenses: Investment advisory services 48,382 Distribution services 50,115 Transfer agent services 20,126 Administrative services 1,703 Reports to shareholders 678 Registration statement and prospectus 341 Postage, stationery and supplies 2,172 Directors' compensation 354 Auditing and legal 84 Custodian 1,002 State and local taxes 1 Other 187 Total expenses before reimbursement 125,145 Reimbursement of expenses 126 125,019 Net investment income 358,360 NET REALIZED LOSS AND UNREALIZED APPRECIATION ON INVESTMENTS AND NON-U.S. CURRENCY: Net realized loss on: Investments (602,732) Non-U.S. currency transactions (764) (603,496) Net unrealized appreciation on: Investments 5,356,632 Non-U.S. currency translations 51 5,356,683 Net realized loss and unrealized appreciation on investments and non-U.S. currency 4,753,187 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,111,547
See Notes to Financial Statements STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands) Year ended December 31 2003 2002 OPERATIONS: Net investment income $358,360 $306,427 Net realized loss on investments and non-U.S. currency transactions (603,496) (425,234) Net unrealized appreciation (depreciation) on investments and non-U.S. currency translations 5,356,683 (3,522,999) Net increase (decrease) in net assets resulting from operations 5,111,547 (3,641,806) DIVIDENDS PAID TO SHAREHOLDERS FROM NET INVESTMENT INCOME (283,809) (362,738) CAPITAL SHARE TRANSACTIONS (69,713) 90,287 TOTAL INCREASE (DECREASE) IN NET ASSETS 4,758,025 (3,914,257) NET ASSETS: Beginning of year 16,426,012 20,340,269 End of year (including undistributed (distributions in excess of) net investment income: $65,000 and $(19,176), respectively) $21,184,037 $16,426,012
See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Fundamental Investors, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital and income primarily through investments in common stocks. The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) are sponsored by the Commonwealth of Virginia and can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund's share classes are described below: - --------------------------------------------------------------------------------------------------------- SHARE CLASS INITIAL SALES CHARGE CONTINGENT DEFERRED SALES CONVERSION FEATURE CHARGE UPON REDEMPTION - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes A and 529-A Up to 5.75% None (except 1% for None certain redemptions within one year of purchase without an initial sales charge) - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes B and 529-B None Declines from 5% to zero for Classes B and 529-B redemptions within six years convert to classes A and of purchase 529-A, respectively, after eight years - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class C None 1% for redemptions within Class C converts to Class F one year of purchase after 10 years - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class 529-C None 1% for redemptions within None one year of purchase - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class 529-E None None None - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes F and 529-F None None None - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes R-1, R-2, R-3, None None None R-4 and R-5 - ---------------------------------------------------------------------------------------------------------
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class. SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund: SECURITY VALUATION - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities are valued at prices obtained from an independent pricing service, when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices or at prices for securities of comparable maturity, quality and type. Short-term securities maturing within 60 days are valued at amortized cost, which approximates market value. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available are fair valued as determined in good faith by authority of the fund's Board of Directors. Various factors may be reviewed in order to make a good faith determination of a security's fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security. CLASS ALLOCATIONS - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions paid to shareholders are recorded on the ex-dividend date. NON-U.S. CURRENCY TRANSLATION - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect at the end of the reporting period. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately. 2. NON-U.S. INVESTMENTS INVESTMENT RISK - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets. TAXATION - Dividend and interest income is recorded net of non-U.S. taxes paid. 3. FEDERAL INCOME TAXATION AND DISTRIBUTIONS The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. DISTRIBUTIONS - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of securities within 30 days of purchase; scheduled interest payments not received; deferred expenses; cost of investments sold; and net capital losses. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund. As of December 31, 2003, the cost of investment securities for federal income tax purposes was $17,921,825,000. During the year ended December 31, 2003, the fund reclassified $9,625,000 from accumulated net realized loss to undistributed net investment income to align financial reporting with tax reporting. As of December 31, 2003, the components of distributable earnings on a tax basis were as follows: (dollars in thousands) Undistributed net investment income and currency gains $ 66,238 Loss deferrals related to non-U.S. currency that were realized during the period November 1, 2003 through December 31, 2003 (93) Short-term and long-term capital loss deferrals (1,414,128) Gross unrealized appreciation on investment securities 4,287,323 Gross unrealized depreciation on investment securities (1,046,010)
Short-term and long-term capital loss deferrals above include capital loss carryforwards of $95,779,000, $577,387,000 and $740,962,000 expiring in 2009, 2010 and 2011, respectively. The capital loss carryforwards will be used to offset any capital gains realized by the fund in future years through the expiration dates. The fund will not make distributions from capital gains while capital loss carryforwards remain. Distributions paid to shareholders from net investment income and currency gains were as follows (dollars in thousands): YEAR ENDED DECEMBER 31 Share class 2003 2002(1) Class A $ 267,613 $ 345,886 Class B 6,070 8,215 Class C 2,626 3,168 Class F 3,841 3,838 Class 529-A 962 482 Class 529-B 89 64 Class 529-C 127 90 Class 529-E 35 15 Class 529-F 8 2 Class R-1 7 1 Class R-2 213 49 Class R-3 477 78 Class R-4 415 43 Class R-5 1,326 807 Total $ 283,809 $ 362,738
(1) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 4. FEES AND TRANSACTIONS WITH RELATED PARTIES Capital Research and Management Company ("CRMC"), the fund's investment adviser, is the parent company of American Funds Service Company ("AFS"), the fund's transfer agent, and American Funds Distributors, Inc. ("AFD"), the principal underwriter of the fund's shares. INVESTMENT ADVISORY SERVICES - The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.390% on the first $1 billion of daily net assets and decreasing to 0.246% on such assets in excess of $27 billion. For the year ended December 31, 2003, the investment advisory services fee was $48,382,000, which was equivalent to an annualized rate of 0.275% of average daily net assets. CLASS-SPECIFIC FEES AND EXPENSES - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below: DISTRIBUTION SERVICES - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the Board of Directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares. The plans provide for annual expenses, based on a percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the Board of Directors has approved expense amounts lower than plan limits. ------------------------------------------------ ----------------------------- ----------------------------- SHARE CLASS CURRENTLY APPROVED LIMITS PLAN LIMITS ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class A 0.25% 0.25% ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class 529-A 0.25 0.50 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes B and 529-B 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes C, 529-C and R-1 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class R-2 0.75 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes 529-E and R-3 0.50 0.75 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes F, 529-F and R-4 0.25 0.50 ------------------------------------------------ ----------------------------- -----------------------------
All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD for providing certain shareholder services. Expenses in excess of these amounts, up to approved limits, may be used to compensate dealers and wholesalers for shares sold. For classes A and 529-A, the Board of Directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. Each class reimburses AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of December 31, 2003, there were no unreimbursed expenses subject to reimbursement for classes A or 529-A. TRANSFER AGENT SERVICES - The fund has a transfer agent agreement with AFS for classes A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC described below. ADMINISTRATIVE SERVICES - The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all classes of shares other than classes A and B. Each relevant class pays CRMC annual fees of 0.15% (0.10% for Class R-5) based on its respective average daily net assets. Each relevant class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. During the start-up period for classes R-1, R-2, and R-3, CRMC has voluntarily agreed to pay a portion of these fees. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the CollegeAmerica plan. Although these amounts are included with administrative services fees in the accompanying financial statements, the Commonwealth of Virginia is not considered a related party. Administrative services fees are presented gross of any payments made by CRMC. Expenses under the agreements described above for the year ended December 31, 2003, were as follows (dollars in thousands): -------------------------------------------------------------------------------------------------------------- SHARE CLASS DISTRIBUTION TRANSFER AGENT ADMINISTRATIVE SERVICES SERVICES SERVICES -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- CRMC TRANSFER AGENT COMMONWEALTH OF ADMINISTRATIVE SERVICES VIRGINIA SERVICES SERVICES ADMINISTRATIVE -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class A $38,778 $19,207 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class B 6,809 919 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class C 3,117 Included $467 135 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class F 594 Included 357 40 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-A 62 Included 87 11 $ 58 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-B 123 Included 18 8 12 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-C 173 Included 26 8 17 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-E 14 Included 4 1 1 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-F 1 Included 1 -* 3 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-1 9 Included 1 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-2 182 Included 40 177 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-3 190 Included 59 57 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-4 63 Included 38 3 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-5 Not applicable Included 70 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Total $50,115 $20,126 $1,168 $444 $91 -------------------------------------------------------------------------------------------------------------- * Amount less than one thousand.
DEFERRED DIRECTORS' COMPENSATION - Since the adoption of the deferred compensation plan in 1993, Directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors' compensation in the accompanying financial statements includes $188,000 in current fees (either paid in cash or deferred) and a net increase of $166,000 in the value of the deferred amounts. AFFILIATED OFFICERS AND DIRECTORS - Officers and certain Directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or Directors received any compensation directly from the fund. 5. CAPITAL SHARE TRANSACTIONS Capital share transactions in the fund were as follows (dollars and shares in thousands): Reinvestments of dividends Share class Sales(1) and distributions Amount Shares Amount Shares Year ended December 31, 2003 Class A $ 1,760,807 73,050 $ 252,281 10,556 Class B 106,466 4,450 5,861 248 Class C 103,912 4,277 2,524 106 Class F 105,565 4,359 3,347 139 Class 529-A 32,444 1,333 962 40 Class 529-B 7,209 297 89 4 Class 529-C 11,156 458 127 5 Class 529-E 2,001 83 35 1 Class 529-F 730 30 8 -* Class R-1 2,361 97 7 -* Class R-2 37,622 1,581 213 9 Class R-3 57,216 2,436 461 19 Class R-4 35,621 1,487 415 17 Class R-5 42,345 1,675 1,097 45 Total net increase (decrease) $ 2,305,455 95,613 $ 267,427 11,189 Year ended December 31, 2002(2) Class A $ 2,510,082 99,589 $ 325,159 13,445 Class B 196,132 7,724 7,923 335 Class C 161,418 6,407 3,050 130 Class F 135,377 5,446 3,355 141 Class 529-A 44,610 1,774 482 21 Class 529-B 9,031 362 64 3 Class 529-C 12,734 508 90 4 Class 529-E 1,753 72 15 1 Class 529-F 227 10 2 -* Class R-1 179 8 1 -* Class R-2 8,884 402 49 2 Class R-3 14,900 674 78 3 Class R-4 7,251 326 43 2 Class R-5 69,699 2,695 607 27 Total net increase (decrease) $ 3,172,277 125,997 $ 340,918 14,114 Share class Repurchases(1) Net (decrease) increase Amount Shares Amount Shares Year ended December 31, 2003 Class A $ (2,408,135) (101,674) $ (395,047) (18,068) Class B (82,223) (3,502) 30,104 1,196 Class C (46,686) (1,989) 59,750 2,394 Class F (68,012) (2,847) 40,900 1,651 Class 529-A (1,893) (78) 31,513 1,295 Class 529-B (373) (15) 6,925 286 Class 529-C (881) (35) 10,402 428 Class 529-E (81) (3) 1,955 81 Class 529-F (29) (1) 709 29 Class R-1 (760) (31) 1,608 66 Class R-2 (8,100) (342) 29,735 1,248 Class R-3 (15,665) (670) 42,012 1,785 Class R-4 (4,201) (174) 31,835 1,330 Class R-5 (5,556) (217) 37,886 1,503 Total net increase (decrease) $ (2,642,595) (111,578) $ (69,713) (4,776) Year ended December 31, 2002(2) Class A $ (3,217,263) (133,389) $ (382,022) (20,355) Class B (96,136) (4,053) 107,919 4,006 Class C (46,109) (1,969) 118,359 4,568 Class F (48,639) (2,052) 90,093 3,535 Class 529-A (818) (36) 44,274 1,759 Class 529-B (81) (4) 9,014 361 Class 529-C (247) (11) 12,577 501 Class 529-E (5) -* 1,763 73 Class 529-F -* -* 229 10 Class R-1 (2) -* 178 8 Class R-2 (1,911) (86) 7,022 318 Class R-3 (4,035) (182) 10,943 495 Class R-4 (188) (9) 7,106 319 Class R-5 (7,474) (326) 62,832 2,396 Total net increase (decrease) $ (3,422,908) (142,117) $ 90,287 (2,006)
* Amount less than one thousand. (1) Includes exchanges between share classes of the fund. (2) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 6. RESTRICTED SECURITIES The fund has invested in certain securities for which resale may be limited to qualified buyers or which are otherwise restricted. These securities are identified in the investment portfolio. As of December 31, 2003, the total value of restricted securities was $603,538,000, which represented 2.85% of the net assets of the fund. 7. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES The fund made purchases and sales of investment securities, excluding short-term securities, of $5,266,791,000 and $5,506,954,000, respectively, during the year ended December 31, 2003. The fund receives a reduction in its custodian fee equal to the amount of interest calculated on certain cash balances held at the custodian bank. For the year ended December 31, 2003, the custodian fee of $1,002,000 included $7,000 that was offset by this reduction, rather than paid in cash. Financial Highlights (1) Income (loss) from investment operations(2) Net Net asset gains(losses) value, Net on securities Total from beginning investment (both realized investment of period income and unrealized) operations CLASS A: Year ended 12/31/2003 $22.23 $.50 $6.52 $7.02 Year ended 12/31/2002 27.45 .42 (5.14) (4.72) Year ended 12/31/2001 31.16 .40 (3.34) (2.94) Year ended 12/31/2000 32.59 .42 .90 1.32 Year ended 12/31/1999 28.92 .41 6.45 6.86 CLASS B: Year ended 12/31/2003 22.19 .31 6.51 6.82 Year ended 12/31/2002 27.40 .23 (5.14) (4.91) Year ended 12/31/2001 31.12 .18 (3.34) (3.16) Period from 3/15/2000 to 12/31/2000 31.93 .15 1.02 1.17 CLASS C: Year ended 12/31/2003 22.17 .30 6.51 6.81 Year ended 12/31/2002 27.39 .21 (5.14) (4.93) Period from 3/15/2001 to 12/31/2001 28.52 .11 (1.13) (1.02) CLASS F: Year ended 12/31/2003 22.22 .49 6.52 7.01 Year ended 12/31/2002 27.44 .40 (5.14) (4.74) Period from 3/15/2001 to 12/31/2001 28.56 .28 (1.12) (.84) CLASS 529-A: Year ended 12/31/2003 22.22 .50 6.52 7.02 Period from 2/15/2002 to 12/31/2002 26.71 .33 (4.34) (4.01) CLASS 529-B: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/19/2002 to 12/31/2002 26.27 .16 (3.91) (3.75) CLASS 529-C: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/15/2002 to 12/31/2002 26.71 .16 (4.34) (4.18) CLASS 529-E: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 3/7/2002 to 12/31/2002 28.13 .26 (5.85) (5.59) CLASS 529-F: Year ended 12/31/2003 22.22 .45 6.52 6.97 Period from 9/23/2002 to 12/31/2002 21.22 .12 1.08 1.20 CLASS R-1: Year ended 12/31/2003 22.19 .27 6.54 6.81 Period from 6/19/2002 to 12/31/2002 26.04 .13 (3.75) (3.62) CLASS R-2: Year ended 12/31/2003 22.18 .30 6.51 6.81 Period from 5/21/2002 to 12/31/2002 27.39 .14 (5.13) (4.99) CLASS R-3: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 6/4/2002 to 12/31/2002 26.66 .18 (4.38) (4.20) CLASS R-4: Year ended 12/31/2003 22.21 .48 6.53 7.01 Period from 7/25/2002 to 12/31/2002 21.75 .22 .55 .77 CLASS R-5: Year ended 12/31/2003 22.23 .56 6.53 7.09 Period from 5/15/2002 to 12/31/2002 27.62 .28 (5.34) (5.06) Dividends and distributions Dividends (from net Distributions Total Net asset investment (from capital dividends and value, end income) gains) distributions of period CLASS A: Year ended 12/31/2003 $(.40) $- $(.40) $28.85 Year ended 12/31/2002 (.50) - (.50) 22.23 Year ended 12/31/2001 (.40) (.37) (.77) 27.45 Year ended 12/31/2000 (.40) (2.35) (2.75) 31.16 Year ended 12/31/1999 (.40) (2.79) (3.19) 32.59 CLASS B: Year ended 12/31/2003 (.21) - (.21) 28.80 Year ended 12/31/2002 (.30) - (.30) 22.19 Year ended 12/31/2001 (.19) (.37) (.56) 27.40 Period from 3/15/2000 to 12/31/2000 (.13) (1.85) (1.98) 31.12 CLASS C: Year ended 12/31/2003 (.20) - (.20) 28.78 Year ended 12/31/2002 (.29) - (.29) 22.17 Period from 3/15/2001 to 12/31/2001 (.11) - (.11) 27.39 CLASS F: Year ended 12/31/2003 (.39) - (.39) 28.84 Year ended 12/31/2002 (.48) - (.48) 22.22 Period from 3/15/2001 to 12/31/2001 (.28) - (.28) 27.44 CLASS 529-A: Year ended 12/31/2003 (.40) - (.40) 28.84 Period from 2/15/2002 to 12/31/2002 (.48) - (.48) 22.22 CLASS 529-B: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/19/2002 to 12/31/2002 (.30) - (.30) 22.22 CLASS 529-C: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/15/2002 to 12/31/2002 (.31) - (.31) 22.22 CLASS 529-E: Year ended 12/31/2003 (.30) - (.30) 28.83 Period from 3/7/2002 to 12/31/2002 (.33) - (.33) 22.21 CLASS 529-F: Year ended 12/31/2003 (.37) - (.37) 28.82 Period from 9/23/2002 to 12/31/2002 (.20) - (.20) 22.22 CLASS R-1: Year ended 12/31/2003 (.21) - (.21) 28.79 Period from 6/19/2002 to 12/31/2002 (.23) - (.23) 22.19 CLASS R-2: Year ended 12/31/2003 (.22) - (.22) 28.77 Period from 5/21/2002 to 12/31/2002 (.22) - (.22) 22.18 CLASS R-3: Year ended 12/31/2003 (.31) - (.31) 28.82 Period from 6/4/2002 to 12/31/2002 (.25) - (.25) 22.21 CLASS R-4: Year ended 12/31/2003 (.39) - (.39) 28.83 Period from 7/25/2002 to 12/31/2002 (.31) - (.31) 22.21 CLASS R-5: Year ended 12/31/2003 (.46) - (.46) 28.86 Period from 5/15/2002 to 12/31/2002 (.33) - (.33) 22.23 Ratio of Ratio of Net assets, expenses net income Total end of period to average to average return(3) (in millions) net assets net assets CLASS A: Year ended 12/31/2003 31.96% $19,212 .66% 2.08% Year ended 12/31/2002 (17.34) 15,201 .67 1.68 Year ended 12/31/2001 (9.55) 19,331 .65 1.41 Year ended 12/31/2000 4.27 19,872 .64 1.28 Year ended 12/31/1999 24.58 16,603 .63 1.33 CLASS B: Year ended 12/31/2003 30.97 836 1.44 1.30 Year ended 12/31/2002 (17.97) 618 1.45 .91 Year ended 12/31/2001 (10.24) 653 1.42 .64 Period from 3/15/2000 to 12/31/2000 3.73 299 1.39 (5) .53 (5) CLASS C: Year ended 12/31/2003 30.93 413 1.50 1.23 Year ended 12/31/2002 (18.06) 266 1.50 .86 Period from 3/15/2001 to 12/31/2001 (3.60) 203 1.55 (5) .49 (5) CLASS F: Year ended 12/31/2003 31.92 311 .71 2.02 Year ended 12/31/2002 (17.38) 203 .72 1.65 Period from 3/15/2001 to 12/31/2001 (2.97) 153 .74 (5) 1.31 (5) CLASS 529-A: Year ended 12/31/2003 31.99 88 .68 2.03 Period from 2/15/2002 to 12/31/2002 (15.16) 39 .76 (5) 1.64 (5) CLASS 529-B: Year ended 12/31/2003 30.74 19 1.61 1.10 Period from 2/19/2002 to 12/31/2002 (14.35) 8 1.62 (5) .77 (5) CLASS 529-C: Year ended 12/31/2003 30.75 27 1.60 1.11 Period from 2/15/2002 to 12/31/2002 (15.74) 11 1.60 (5) .79 (5) CLASS 529-E: Year ended 12/31/2003 31.42 4 1.08 1.61 Period from 3/7/2002 to 12/31/2002 (19.92) 2 1.07 (5) 1.35 (5) CLASS 529-F: Year ended 12/31/2003 31.72 1 .82 1.81 Period from 9/23/2002 to 12/31/2002 5.65 - (4) .22 .51 CLASS R-1: Year ended 12/31/2003 30.90 2 1.50 (6) 1.08 Period from 6/19/2002 to 12/31/2002 (13.91) - (4) 1.50 (5,6) 1.11 (5) CLASS R-2: Year ended 12/31/2003 30.93 45 1.46 (6) 1.19 Period from 5/21/2002 to 12/31/2002 (18.22) 7 1.46 (5,6) 1.05 (5) CLASS R-3: Year ended 12/31/2003 31.45 66 1.08 (6) 1.60 Period from 6/4/2002 to 12/31/2002 (15.75) 11 1.08 (5,6) 1.41 (5) CLASS R-4: Year ended 12/31/2003 31.91 48 .71 1.94 Period from 7/25/2002 to 12/31/2002 3.51 7 .32 (6) .96 CLASS R-5: Year ended 12/31/2003 32.34 112 .39 2.30 Period from 5/15/2002 to 12/31/2002 (18.34) 53 .40 (5) 1.91 (5)
YEAR ENDED DECEMBER 31 2003 2002 2001 2000 1999 Portfolio turnover rate for all classes of shares 31% 38% 29% 43% 46%
(1) Based on operations for the period shown (unless otherwise noted) and, accordingly, may not be representative of a full year. (2) Year ended 1999 is based on shares outstanding on the last day of the year; all other periods are based on average shares outstanding. (3) Total returns exclude all sales charges, including contingent deferred sales charges. (4) Amount less than 1 million. (5) Annualized. (6) During the start-up period for this class, CRMC voluntarily agreed to pay a portion of the fees relating to transfer agent services. Had CRMC not paid such fees, expense ratios would have been 1.70%, 1.94% and 1.10% for classes R-1, R-2 and R-3, respectively, during the year ended December 31, 2003, and 4.20%, 1.64%, 1.13% and .34% for classes R-1, R-2, R-3 and R-4, respectively, during the period ended December 31, 2002. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FUNDAMENTAL INVESTORS, INC.: We have audited the accompanying statement of assets and liabilities of Fundamental Investors, Inc. (the "Fund"), including the investment portfolio, as of December 31, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fundamental Investors, Inc. as of December 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Los Angeles, California February 5, 2004 TAX INFORMATION (UNAUDITED) We are required to advise you within 60 days of the fund's fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. As a result of recent tax legislation, individual shareholders are now eligible for reduced tax rates on qualified dividend income received during the year. For purposes of computing the dividends eligible for reduced tax rates, 98% of the dividends paid by the fund from net investment income are considered qualified dividend income. Corporate shareholders may exclude up to 70% of qualifying dividends received during the year. For purposes of computing this exclusion, 90% of the dividends paid by the fund from net investment income represent qualifying dividends. Certain states may exempt from income taxation that portion of the dividends paid from net investment income that was derived from direct U.S. government obligations. For purposes of computing this exclusion, 0.17% of the dividends paid by the fund from net investment income were derived from interest on direct U.S. government obligations. Dividends and distributions received by retirement plans such as IRAs, Keogh-type plans and 403(b) plans need not be reported as taxable income. However, many retirement plan trusts may need this information for their annual information reporting. SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH WILL BE MAILED IN JANUARY 2004 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 2003 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS. FUNDAMENTAL INVESTORS, INC. Part B Retirement Plan Statement of Additional Information March 1, 2004 as supplemented January 1, 2005 This document is not a prospectus but should be read in conjunction with the current Retirement Plan Prospectus of Fundamental Investors, Inc. (the "fund" or "FI") dated March 1, 2004. The prospectus may be obtained from your financial adviser or by writing to the fund at the following address: Fundamental Investors, Inc. Attention: Secretary One Market Steuart Tower, Suite 1800 San Francisco, California 94105 (415) 421-9360 TABLE OF CONTENTS
Item Page No. - ---- -------- Certain Investment Limitations and Guidelines . . . . . . . . . . . 2 Description of Certain Securities and Investment Techniques . . . . 2 Fundamental Policies and Investment Restrictions. . . . . . . . . . 5 Management of the Fund. . . . . . . . . . . . . . . . . . . . . . . 7 Taxes and Distributions . . . . . . . . . . . . . . . . . . . . . . 21 Purchase, Exchange and Sale of Shares . . . . . . . . . . . . . . . 24 Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Class A Sales Charge Reductions . . . . . . . . . . . . . . . . . . 30 Price of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Shareholder Account Services . . . . . . . . . . . . . . . . . . . 34 Execution of Portfolio Transactions . . . . . . . . . . . . . . . . 34 General Information . . . . . . . . . . . . . . . . . . . . . . . . 35 Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Financial Statements
Fundamental Investors - Page 1 CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES The following limitations and guidelines are considered at the time of purchase, under normal circumstances, and are based on a percentage of the fund's net assets unless otherwise noted. This summary is not intended to reflect all of the fund's investment limitations. DEBT SECURITIES .. The fund may invest up to 5% of its assets in straight debt securities (i.e, not convertible into equity) rated Ba or below by Moody's Investors Service, Inc. ("Moody's") and BB or below by Standard & Poor's Corporation ("S&P") or unrated but determined to be of equivalent quality. NON-U.S. SECURITIES .. The fund may invest up to 30% of its assets in securities of issuers that are domiciled outside the United States and not included in the S&P 500 Composite Index. * * * * * * The fund may experience difficulty liquidating certain portfolio securities during significant market declines or periods of heavy redemptions. DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES The descriptions below are intended to supplement the material in the prospectus under "Investment Objective, Strategies and Risks." EQUITY SECURITIES - Equity securities represent an ownership position in a company. Equity securities held by the fund typically consist of common stocks. The prices of equity securities fluctuate based on, among other things, events specific to their issuers and market, economic and other conditions. The growth-oriented, equity-type securities generally purchased by the fund may involve large price swings and potential for loss. DEBT SECURITIES - Debt securities are used by issuers to borrow money. Issuers pay investors interest and generally must repay the amount borrowed at maturity. Some debt securities, such as zero coupon bonds, do not pay current interest, but are purchased at a discount from their face values. The prices of debt securities fluctuate depending on such factors as interest rates, credit quality and maturity. In general, prices of debt securities decline when interest rates rise and increase when interest rates fall. Lower rated debt securities, rated Ba or below by Moody's and/or BB or below by S&P or unrated but determined to be of equivalent quality, are described by the rating agencies as speculative and involve greater risk of default or price changes due to changes in the issuer's creditworthiness than higher rated debt securities, or they may already be in default. The market prices of these securities may fluctuate more than higher quality securities and may decline significantly in periods of general economic difficulty. It may be more difficult to dispose of, or to determine the value of, lower rated debt securities. Fundamental Investors - Page 2 SECURITIES WITH EQUITY AND DEBT CHARACTERISTICS - The fund may invest in securities that have a combination of equity and debt characteristics. These securities may at times behave more like equity than debt and vice versa. Some types of convertible bonds or preferred stocks automatically convert into common stocks. The prices and yields of nonconvertible preferred stocks generally move with changes in interest rates and the issuer's credit quality, similar to the factors affecting debt securities. Convertible bonds, convertible preferred stocks and other securities may sometimes be converted into common stocks or other securities at a stated conversion ratio. These securities, prior to conversion, pay a fixed rate of interest or a dividend. Because convertible securities have both debt and equity characteristics, their value varies in response to many factors, including the value of the underlying assets, general market and economic conditions, and convertible market valuations, as well as changes in interest rates, credit spreads, and the credit quality of the issuer. INVESTING IN VARIOUS COUNTRIES - Investing outside the United States may involve additional risks, caused by, among other things, currency controls and fluctuating currency values; different accounting, auditing, financial reporting and legal standards and practices in some countries; changing local, regional and global economic, political and social conditions; expropriation; changes in tax policy; greater market volatility; differing securities market structures; and various administrative difficulties, such as delays in clearing and settling portfolio transactions or in receiving payment of dividends. The risks described above may be heightened in connection with investments in developing countries. Although there is no universally accepted definition, a developing country is generally considered to be a country in the initial stages of its industrialization cycle with a low per capita gross national product. For example, political and/or economic structures in these countries may be in their infancy and developing rapidly. Historically, the markets of developing countries have been more volatile than the markets of developed countries. The fund may invest in securities of issuers in developing countries only to a limited extent. Additional costs could be incurred in connection with the fund's investment activities outside the United States. Brokerage commissions may be higher outside the United States, and the fund will bear certain expenses in connection with its currency transactions. Furthermore, increased custodian costs may be associated with maintaining assets in certain jurisdictions. CURRENCY TRANSACTIONS - The fund may purchase and sell currencies to facilitate securities transactions and enter into forward currency contracts to protect against changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Forward currency contracts entered into by the fund will involve the purchase or sale of one currency against the U.S. dollar. While entering into forward currency transactions could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain that may result from an increase in the value of the currency. The fund will not generally attempt to protect against all potential changes in exchange rates. The fund will segregate liquid assets that will be marked to market daily to meet its forward contract commitments to the extent required by the Securities and Exchange Commission. Fundamental Investors - Page 3 Certain provisions of the Internal Revenue Code may affect the extent to which the fund may enter into forward contracts. Such transactions also may affect the character and timing of income, gain or loss recognized by the fund for U.S. federal income tax purposes. INVESTING IN SMALLER CAPITALIZATION STOCKS - The fund may invest in the stocks of smaller capitalization companies (typically companies with market capitalizations of less than $1.5 billion at the time of purchase). The investment adviser believes that the issuers of smaller capitalization stocks often provide attractive investment opportunities. However, investing in smaller capitalization stocks can involve greater risk than is customarily associated with investing in stocks of larger, more established companies. For example, smaller companies often have limited product lines, markets or financial resources, may be dependent for management on one or a few key persons, and can be more susceptible to losses. Also, their securities may be thinly traded (and therefore have to be sold at a discount from current prices or sold in small lots over an extended period of time), may be followed by fewer investment research analysts, and may be subject to wider price swings, thus creating a greater chance of loss than securities of larger capitalization companies. U.S. TREASURY SECURITIES - U.S. Treasury securities include direct obligations of the U.S. Treasury, such as Treasury bills, notes and bonds. For these securities, the payment of principal and interest is unconditionally guaranteed by the U.S. government, and thus they are of the highest possible credit quality. Such securities are subject to variations in market value due to fluctuations in interest rates, but, if held to maturity, will be paid in full. U.S. AGENCY SECURITIES - U.S. agency securities include those securities issued by certain U.S. government instrumentalities and certain federal agencies. These securities are neither direct obligations of, nor guaranteed by, the Treasury. However, they generally involve some form of federal sponsorship: some are backed by specific types of collateral; some are supported by the issuer's right to borrow from the Treasury; and others are supported only by the credit of the issuing government agency or instrumentality. These agencies and instrumentalities include, but are not limited to: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae"), Tennessee Valley Authority and Federal Farm Credit Bank System. CASH AND CASH EQUIVALENTS - These include: (i) commercial paper (for example, short-term notes up to 12 months in maturity issued by corporations, governmental bodies or bank/ corporation sponsored conduits (asset-backed commercial paper)), (ii) commercial bank obligations (for example, certificates of deposit, bankers' acceptances (time drafts on a commercial bank where the bank accepts an irrevocable obligation to pay at maturity)), (iii) savings association and savings bank obligations (for example, bank notes and certificates of deposit issued by savings banks or savings associations), (iv) securities of the U.S. government, its agencies or instrumentalities that mature, or may be redeemed, in one year or less, and (v) corporate bonds and notes that mature, or that may be redeemed, in one year or less. REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements under which the fund buys a security and obtains a simultaneous commitment from the seller to repurchase the security at a specified time and price. Repurchase agreements permit the fund to maintain liquidity and earn income over periods of time as short as overnight. The seller must maintain with the fund's custodian collateral equal to at least 100% of the repurchase price, including accrued interest, as monitored daily by the investment adviser. The fund will only enter into repurchase agreements involving securities in which it could otherwise invest and with selected Fundamental Investors - Page 4 banks and securities dealers whose financial condition is monitored by the investment adviser. If the seller under the repurchase agreement defaults, the fund may incur a loss if the value of the collateral securing the repurchase agreement has declined and may incur disposition costs in connection with liquidating the collateral. If bankruptcy proceedings are commenced with respect to the seller, realization of the collateral by the fund may be delayed or limited. RESTRICTED SECURITIES AND LIQUIDITY - The fund may purchase securities subject to restrictions on resale. Securities not actively traded will be considered illiquid unless they have been specifically determined to be liquid under procedures adopted by the fund's Board of Directors, taking into account factors such as the frequency and volume of trading, the commitment of dealers to make markets and the availability of qualified investors, all of which can change from time to time. The fund may incur certain additional costs in disposing of illiquid securities. * * * * * * PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the length of time particular investments may have been held. Short-term trading profits are not the fund's objective, and changes in its investments are generally accomplished gradually, though short-term transactions may occasionally be made. High portfolio turnover (100% or more) involves correspondingly greater transaction costs in the form of dealer spreads or brokerage commissions, and may result in the realization of net capital gains, which are taxable when distributed to shareholders. A fund's portfolio turnover rate would equal 100% if each security in the fund's portfolio were replaced once per year. The fund's portfolio turnover rates for the fiscal years ended 2003 and 2002 were 31% and 38%, respectively. See "Financial Highlights" in the prospectus for the fund's annual portfolio turnover rate for each of the last five fiscal years. FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS FUNDAMENTAL POLICIES - The fund has adopted the following fundamental policies and investment restrictions which may not be changed without approval by holders of a majority of its outstanding shares. Such majority is defined in the Investment Company Act of 1940, as amended (the "1940 Act"), as the vote of the lesser of (i) 67% or more of the outstanding voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities are present in person or by proxy, or (ii) more than 50% of the outstanding voting securities. All percentage limitations are considered at the time securities are purchased and are based on the fund's net assets unless otherwise indicated. None of the following investment restrictions involving a maximum percentage of assets will be considered violated unless the excess occurs immediately after, and is caused by, an acquisition by the fund. The fund may not: 1. borrow money or securities; 2. buy securities "on margin"; 3. effect "short sales" of securities; 4. mortgage, pledge or hypothecate securities; Fundamental Investors - Page 5 5. lend money or securities (but the purchase of a portion of an issue of publicly distributed debt securities is not considered the making of a loan); 6. invest in the securities of any issuer which, including predecessors, has a record of less than three years continuous operation; 7. invest in the securities of any issuer if any officer or director of the fund owns more than 1/2 of 1% of the securities of that issuer or if the fund's officers and directors together own more than 5% of the securities of that issuer; 8. invest any of its assets in the securities of any managed investment trust or of any other managed investment company; 9. invest more than 5% of its total assets at the market value at the time of investment in securities of any one issuer, or hold more than 10% of such securities of any one issuer, but these limitations do not apply to obligations of or guaranteed by the U.S.; 10. purchase or sell real estate; 11. purchase or sell commodities or commodity contracts; 12. act as underwriter of securities issued by other persons; 13. make investments in other companies for the purpose of exercising control or management; 14. concentrate its investments in any one industry or group of industries, but may invest up to 25% of its assets in any one industry. Notwithstanding investment restriction number 8, the fund may invest in securities of other investment companies if deemed advisable by its officers in connection with the administration of a deferred compensation plan adopted by Directors pursuant to an exemptive order granted by the Securities and Exchange Commission. For purposes of investment restriction number 14, the fund will not invest 25% or more (rather than more than 25%) of its total assets in the securities of issuers in the same industry. NON-FUNDAMENTAL POLICIES - The following policies may be changed without shareholder approval: 1. The fund will not invest in puts or calls; or invest more than 10% of the value of its total assets in securities which are not readily marketable (including repurchase agreements maturing in more than seven days or securities for which there is no active and substantial market). 2. No officer or director of the fund may sell portfolio securities to the fund or buy portfolio securities from it. 3. The fund may not issue senior securities, except as permitted by the 1940 Act. Fundamental Investors - Page 6 MANAGEMENT OF THE FUND BOARD OF DIRECTORS AND OFFICERS
YEAR FIRST NUMBER OF BOARDS POSITION ELECTED WITHIN THE FUND OTHER DIRECTORSHIPS/3/ WITH THE A DIRECTOR PRINCIPAL OCCUPATION(S) DURING COMPLEX/2/ ON WHICH HELD NAME AND AGE FUND OF THE FUND/1/ PAST 5 YEARS DIRECTOR SERVES BY DIRECTOR - ----------------------------------------------------------------------------------------------------------------------------------- "NON-INTERESTED" DIRECTORS - ----------------------------------------------------------------------------------------------------------------------------------- Joseph C. Berenato Director 2003 Chairman of the Board and CEO, 4 Ducommun Incorporated Age: 57 Ducommun Incorporated (aerospace components manufacturer) - ----------------------------------------------------------------------------------------------------------------------------------- Robert A. Fox Director 1998 Managing General Partner, Fox 7 Crompton Corporation Age: 66 Investments LP; former Professor, University of California; retired President and CEO, Foster Farms (poultry producer) - ----------------------------------------------------------------------------------------------------------------------------------- Leonade D. Jones Director 1998 Co-founder, VentureThink LLC 6 None Age: 56 (developed and managed e-commerce businesses) and Versura Inc. (education loan exchange); former Treasurer, The Washington Post Company - ----------------------------------------------------------------------------------------------------------------------------------- John G. McDonald Director 1998 The IBJ Professor of Finance, 8 iStar Financial, Inc.; Age: 66 Graduate School of Business, Plum Creek Timber Co.; Stanford University Scholastic Corporation; Varian, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Gail L. Neale Director 1985 President, The Lovejoy 5 None Age: 69 Consulting Group, Inc. (a pro bono consulting group advising nonprofit organizations) - ----------------------------------------------------------------------------------------------------------------------------------- Henry E. Riggs Director 1989 Chairman of the Board and 4 None Age: 69 President Emeritus, Keck Graduate Institute of Applied Life Sciences - ----------------------------------------------------------------------------------------------------------------------------------- Patricia K. Woolf, Director 1998 Private investor; corporate 6 Crompton Corporation; Ph.D. director; lecturer, Department First Energy Age: 69 of Molecular Biology, Corporation; National Princeton University Life Holding Co. - -----------------------------------------------------------------------------------------------------------------------------------
Fundamental Investors - Page 7
PRINCIPAL OCCUPATION(S) DURING YEAR FIRST PAST 5 YEARS AND ELECTED POSITIONS HELD NUMBER OF BOARDS POSITION A DIRECTOR WITH AFFILIATED ENTITIES WITHIN THE FUND OTHER DIRECTORSHIPS/3/ WITH THE AND/OR OFFICER OR THE PRINCIPAL UNDERWRITER COMPLEX/2/ ON WHICH HELD NAME AND AGE FUND OF THE FUND/1/ OF THE FUND DIRECTOR SERVES BY DIRECTOR - ----------------------------------------------------------------------------------------------------------------------------------- "INTERESTED" DIRECTORS/4,5/ - ----------------------------------------------------------------------------------------------------------------------------------- James F. Chairman of 1998 President and Director, 3 None Rothenberg the Board Capital Research and Management Company; Director, American Funds Distributors, Age: 57 Inc.*; Director, American Funds Service Company*; Director, The Capital Group Companies, Inc.*;Director, Capital Group Research, Inc.* - ----------------------------------------------------------------------------------------------------------------------------------- Dina N. Perry President 1994 Senior Vice President, None Capital Research and Management Company; Director, Age: 58 Capital Research Company* - -----------------------------------------------------------------------------------------------------------------------------------
Fundamental Investors - Page 8
PRINCIPAL OCCUPATION(S) DURING POSITION YEAR FIRST ELECTED PAST 5 YEARS AND POSITIONS HELD WITH THE AN OFFICER WITH AFFILIATED ENTITIES NAME AND AGE FUND OF THE FUND/1/ OR THE PRINCIPAL UNDERWRITER OF THE FUND - ---------------------------------------------------------------------------------------------------------------------------------- OTHER OFFICERS/5/ - ---------------------------------------------------------------------------------------------------------------------------------- Gordon Crawford Senior Vice 1994 Senior Vice President and Director, Capital Research and President Management Company Age: 57 - ---------------------------------------------------------------------------------------------------------------------------------- Paul G. Haaga, Jr. Senior Vice 1994 Executive Vice President and Director, Capital Research and President Management Company; Director, The Capital Group Companies, Age: 55 Inc.*; Director, American Funds Distributors, Inc.* - ---------------------------------------------------------------------------------------------------------------------------------- Michael T. Kerr Senior Vice 1995 Senior Vice President, Capital Research Company* President Age: 44 - ---------------------------------------------------------------------------------------------------------------------------------- Martin Romo Senior Vice President 1999 Executive Vice President and Director, Capital Research Company* Age: 36 - ---------------------------------------------------------------------------------------------------------------------------------- Ronald B. Morrow Vice President 2004 Senior Vice President, Capital Research Company* Age: 58 - ---------------------------------------------------------------------------------------------------------------------------------- Patrick F. Quan Secretary 1989-1998 Vice President - Fund Business Management Group, Capital 2000 Research and Management Company Age: 45 - ---------------------------------------------------------------------------------------------------------------------------------- Sheryl F. Johnson Treasurer 1998 Vice President - Fund Business Management Group, Capital Research and Management Company Age: 35 - ---------------------------------------------------------------------------------------------------------------------------------- David A. Pritchett Assistant Treasurer 1999 Vice President - Fund Business Management Group, Capital Research and Management Company Age: 37 - ----------------------------------------------------------------------------------------------------------------------------------
* Company affiliated with Capital Research and Management Company. 1 Directors and officers of the fund serve until their resignation, removal or retirement. 2 Capital Research and Management Company manages the American Funds, consisting of 29 funds. Capital Research and Management Company also manages American Funds Insurance Series, which serves as the underlying investment vehicle for certain variable insurance contracts, and Endowments, whose shareholders are limited to certain non-profit organizations. 3 This includes all directorships (other than those of the American Funds) that are held by each Director as a director of a public company or a registered investment company. 4 "Interested persons" within the meaning of the 1940 Act on the basis of their affiliation with the fund's investment adviser, Capital Research and Management Company, or affiliated entities (including the fund's principal underwriter). 5 All of the officers listed, except Ronald B. Morrow and Martin Romo, are officers and/or directors/trustees of one or more of the other funds for which Capital Research and Management Company serves as investment adviser. THE ADDRESS FOR ALL DIRECTORS AND OFFICERS OF THE FUND IS 333 SOUTH HOPE STREET - - 55TH FLOOR, LOS ANGELES, CALIFORNIA 90071, ATTENTION: FUND SECRETARY. Fundamental Investors - Page 9 FUND SHARES OWNED BY DIRECTORS AS OF DECEMBER 31, 2003
AGGREGATE DOLLAR RANGE/1/ OF SHARES OWNED IN ALL FUNDS IN THE AMERICAN FUNDS DOLLAR RANGE/1/ OF FUND FAMILY OVERSEEN NAME SHARES OWNED BY DIRECTOR - ------------------------------------------------------------------------------- "NON-INTERESTED" DIRECTORS - ------------------------------------------------------------------------------- Joseph C. Berenato $1 - $10,000/2/ $50,001 - $100,000 - ------------------------------------------------------------------------------- Robert A. Fox Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- Leonade D. Jones $ 10,001 - $50,000 Over $100,000 - ------------------------------------------------------------------------------- John G. McDonald $50,001 - $100,000 Over $100,000 - ------------------------------------------------------------------------------- Gail L. Neale $50,001 - $100,000 Over 100,000 - ------------------------------------------------------------------------------- Henry E. Riggs Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- Patricia K. Woolf $ 10,001 - $50,000 Over $100,000 - ------------------------------------------------------------------------------- "INTERESTED" DIRECTORS/3/ - ------------------------------------------------------------------------------- Dina N. Perry Over $100,000 Over $100,000 - ------------------------------------------------------------------------------- James F. Rothenberg Over $100,000 Over $100,000 - -------------------------------------------------------------------------------
1 Ownership disclosure is made using the following ranges: None; $1 - $10,000; $10,001 - $50,000; $50,001 - $100,000 and Over $100,000. The amounts listed for "interested" Directors include shares owned through The Capital Group Companies, Inc. retirement plan and 401(k) plan. 2 Shares owned as of January 26, 2004 3 "Interested persons" within the meaning of the 1940 Act on the basis of their affiliation with the fund's investment adviser, Capital Research and Management Company, or affiliated entities (including the fund's principal underwriter). DIRECTOR COMPENSATION - No compensation is paid by the fund to any officer or Director who is a director, officer or employee of the investment adviser or its affiliates. The fund pays to Directors who are not affiliated with the investment adviser: (a) fees of $2,000 for each Board of Directors meeting attended, (b) $1,000 for each meeting attended as a member of a committee of the Board of Directors and (c) annual fees of either $16,000 (if the Director also receives compensation as a member of the Board of another fund advised by the investment adviser and the other Board typically meets separately from the fund's Board of Directors), or $50,000 (for all other unaffiliated Directors), a pro rata portion of which is paid by the fund and another fund whose Board meets jointly with the fund's Board of Directors. The payment by the fund to certain unaffiliated Directors of a larger per fund annual fee reflects the significant time and labor commitment required of any mutual fund Board member overseeing even one fund. The Nominating Committee of the Board of Directors, a Committee comprised exclusively of Directors not affiliated with the investment adviser, reviews Director compensation periodically, and typically recommends adjustments every other year. In making its recommendations, the Nominating Committee considers a number of factors, including operational, regulatory and other developments affecting the scope and complexity of the Board's oversight obligations, as well as Fundamental Investors - Page 10 comparative industry data. In lieu of meeting attendance fees, members of the Proxy Committee receive an annual retainer fee of $4,500 from the fund if they serve as a member of four proxy committees, or $6,250 if they serve as a member of two proxy committees, meeting jointly. No pension or retirement benefits are accrued as part of fund expenses. The Directors may elect, on a voluntary basis, to defer all or a portion of their fees through a deferred compensation plan in effect for the fund. The fund also reimburses certain expenses of the Directors who are not affiliated with the investment adviser. DIRECTOR COMPENSATION PAID DURING THE FISCAL YEAR ENDED DECEMBER 31, 2003
TOTAL COMPENSATION (INCLUDING AGGREGATE COMPENSATION VOLUNTARILY DEFERRED (INCLUDING VOLUNTARILY COMPENSATION/1/) DEFERRED COMPENSATION/1/) FROM ALL FUNDS MANAGED BY FROM THE FUND CAPITAL RESEARCH AND MANAGEMENT NAME COMPANY OR ITS AFFILIATES/2/ - ------------------------------------------------------------------------------------------------------------------------------------ Joseph C. Berenato/3//,4/ $ 2,334 $ 54,584 - ------------------------------------------------------------------------------------------------------------------------------------ Robert A. Fox/3/ 28,500 198,500 - ------------------------------------------------------------------------------------------------------------------------------------ Leonade D. Jones 28,625 171,540 - ------------------------------------------------------------------------------------------------------------------------------------ John G. McDonald/3/ 26,000 270,500 - ------------------------------------------------------------------------------------------------------------------------------------ Gail L. Neale/3/ 23,750 96,500 - ------------------------------------------------------------------------------------------------------------------------------------ Henry E. Riggs/3/ 25,000 108,000 - ------------------------------------------------------------------------------------------------------------------------------------ Patricia K. Woolf/3/ 27,500 161,000 - ------------------------------------------------------------------------------------------------------------------------------------
1 Amounts may be deferred by eligible Directors under a non-qualified deferred compensation plan adopted by the fund in 1993. Deferred amounts accumulate at an earnings rate determined by the total return of one or more American Funds as designated by the Directors. Compensation for the fiscal year ended December 31, 2003 includes earnings on amounts deferred in previous fiscal years. 2 Capital Research and Management Company manages the American Funds, consisting of 29 funds. Capital Research and Management Company also manages American Funds Insurance Series, which serves as the underlying investment vehicle for certain variable insurance contracts, and Endowments, whose shareholders are limited to certain non-profit organizations. 3 Since the deferred compensation plan's adoption, the total amount of deferred compensation accrued by the fund (plus earnings thereon) through the 2003 fiscal year for participating Directors is as follows: Joseph C. Berenato ($2,442), Robert A. Fox ($144,906), John G. McDonald ($164,992), Gail L. Neale ($18,610), Henry E. Riggs ($291,988) and Patricia K. Woolf ($62,873). Amounts deferred and accumulated earnings thereon are not funded and are general unsecured liabilities of the fund until paid to the Directors. 4 Elected effective December 11, 2003. As of February 1, 2004, the officers and Directors of the fund and their families, as a group, owned beneficially or of record less than 1% of the outstanding shares of the fund. FUND ORGANIZATION AND THE BOARD OF DIRECTORS - The fund, an open-end, diversified management investment company, was organized as a Delaware corporation on October 17, 1932 and reincorporated in Maryland on February 1, 1990. Although the Board of Directors has delegated day-to-day oversight to the investment adviser, all fund operations are supervised by the fund's Board, which meets periodically and performs duties required by applicable state and federal laws. Fundamental Investors - Page 11 Under Maryland law, the fund's business and affairs are managed under the direction of the Board of Directors, and all powers of the fund are exercised by or under the authority of the Board except as reserved to the shareholders by law or the fund's charter or by-laws. Maryland law requires each Director to perform his/her duties as a Director, including his/her duties as a member of any Board committee on which he/she serves, in good faith, in a manner he/she reasonably believes to be in the best interest of the fund, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Members of the Board who are not employed by the investment adviser or its affiliates are paid certain fees for services rendered to the fund as described above. They may elect to defer all or a portion of these fees through a deferred compensation plan in effect for the fund. The fund has several different classes of shares, including Class A, B, C, F, 529-A, 529-B, 529-C, 529-E, 529-F, R-1, R-2, R-3, R-4 and R-5 shares. Class R shares are generally only available to employer-sponsored retirement plans. The B, C, F and 529 share classes are described in more detail in the fund's retail prospectus and retail statement of additional information. The shares of each class represent an interest in the same investment portfolio. Each class has pro rata rights as to voting, redemption, dividends and liquidation, except that each class bears different distribution expenses and may bear different transfer agent fees and other expenses properly attributable to the particular class as approved by the Board of Directors and set forth in the fund's rule 18f-3 Plan. Each class' shareholders have exclusive voting rights with respect to the respective class' rule 12b-1 Plans adopted in connection with the distribution of shares and on other matters in which the interests of one class are different from interests in another class. Shares of all classes of the fund vote together on matters that affect all classes in substantially the same manner. Each class votes as a class on matters that affect that class alone. The fund does not hold annual meetings of shareholders. However, significant matters that require shareholder approval, such as certain elections of Board members or a change in a fundamental investment policy, will be presented to shareholders at a meeting called for such purpose. Shareholders have one vote per share owned. At the request of the holders of at least 10% of the shares, the fund will hold a meeting at which any member of the Board could be removed by a majority vote. COMMITTEES OF THE BOARD OF DIRECTORS - The fund has an Audit Committee comprised of Joseph C. Berenato, Robert A. Fox, Leonade D. Jones and John G. McDonald, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee provides oversight regarding the fund's accounting and financial reporting policies and practices, its internal controls and the internal controls of the fund's principal service providers. The Committee acts as a liaison between the fund's independent auditors and the full Board of Directors. Two Audit Committee meetings were held during the 2003 fiscal year. The fund has a Governance and Contracts Committee comprised of Joseph C. Berenato, Robert A. Fox, Leonade D. Jones, John G. McDonald, Gail L. Neale, Henry E. Riggs and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee's function is to request, review and consider the information deemed necessary to evaluate the terms of certain agreements between the fund and its investment adviser or the investment adviser's affiliates, such as the Investment Advisory and Service Agreement, Principal Underwriting Agreement, Administrative Services Agreement and Plans of Distribution under rule 12b-1 of the 1940 Act, that the fund may enter into, renew or continue, and to make its Fundamental Investors - Page 12 recommendations to the full Board of Directors on these matters. One Contracts Committee meeting was held during the 2003 fiscal year. The fund has a Nominating Committee comprised of Robert A. Fox, Leonade D. Jones, John G. McDonald, Gail L. Neale and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee periodically reviews such issues as the Board's composition, responsibilities, committees, compensation and other relevant issues, and recommends any appropriate changes to the full Board of Directors. The Committee also evaluates, selects and nominates independent director candidates to the full Board of Directors. While the Committee normally is able to identify from its own and other resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the Board. Such suggestions must be sent in writing to the Nominating Committee of the fund, addressed to the fund's Secretary, and must be accompanied by complete biographical and occupational data on the prospective nominee, along with a written consent of the prospective nominee for consideration of his or her name by the Committee. Five Nominating Committee meetings were held during the 2003 fiscal year. The fund has a Proxy Committee comprised of Robert A. Fox, Leonade D. Jones, John G. McDonald, Henry E. Riggs and Patricia K. Woolf, none of whom is an "interested person" of the fund within the meaning of the 1940 Act. The Committee's functions include establishing and reviewing procedures and policies for voting proxies of companies held in the fund's portfolio, making determinations with regard to certain contested proxy voting issues, and discussing related current issues. Four Proxy Committee meetings were held during the 2003 fiscal year. PRINCIPAL FUND SHAREHOLDERS - The following table identifies those investors who own of record or are known by the fund to own beneficially 5% or more of any class of its shares as of the opening of business on February 1, 2004:
NAME AND ADDRESS OWNERSHIP PERCENTAGE - ------------------------------------------------------------------------------- Edward D. Jones & Co. Class A 16.63% 201 Progress Pkwy. Maryland Hts., MO 63043-3009 - ------------------------------------------------------------------------------- Thomas A. Gennarelli TTEE Class R-1 5.02 Thomas A. Gennarelli Defined Benefit Plan 7200 N. Beach Dr. Fox Point, WI 53217-3659 - ------------------------------------------------------------------------------- NFSC FEBO #251-044415 Class R-1 28.43 The Matco Group, Inc. 401K Plan Reliance Trust Company TTEE 320 N. Jensen Rd. Vestal, NY 13850-2111 - ------------------------------------------------------------------------------- MLPF&S For the Sole Benefit of Its Customers Class R-3 9.76 4800 Deer Lake Dr. E, Fl. 2 Jacksonville, FL 32246-6484 - ------------------------------------------------------------------------------- Smith Barney 401K Account Tr. Class R-3 7.43 Smith Barney Corporate Trust Co. TTEE 2 Tower Center Blvd. P.O. Box 1063 E. Brunswick, NJ 08816-1063 - ------------------------------------------------------------------------------- Delaware Charter Guarantee & Trust Class R-3 5.53 Prinicipal Financial Group Omnibus Class R-4 5.29 711 High St. Des Moines, IA 50392-0001 - ------------------------------------------------------------------------------- CB&T Trustee For Class R-4 8.70 Smithgroup Inc. c/o Fascorp - Inv/Mutual Fund Trading 8515 E. Orchard Rd., #2T2 Greenwood Vlg., CO 80111-5002 - ------------------------------------------------------------------------------- BB&T Trust Class R-4 21.57 W. E. Stanley & Co. Omnibus Account P.O. Box 14967 Greensboro, NC 27415-4967 - ------------------------------------------------------------------------------- CB&T Trustee For Class R-4 8.37 EMS 401K Profit Sharing Plan c/o Fascorp - Inv/Mutual Fund Trading 8515 E. Orchard Rd., #2T2 Greenwood Vlg., CO 80111-5002 - ------------------------------------------------------------------------------- CB&T Trustee For Class R-4 7.91 Olsson Assoc. Inc. Cash or Def. PSP & Trust c/o Fascorp - Inv/Mutual Fund Trading 8515 E. Orchard Rd., #2T2 Greenwood Vlg., CO 80111-5002 - ------------------------------------------------------------------------------- Emjayco TTEE Class R-4 16.67 FBO Cornerstone Health Care PA P.O. Box 170190 Milwaukee, WI 53217-8016 - ------------------------------------------------------------------------------- Saxon & Co. Class R-4 15.92 FBO 20-01-302-9912426 P.O. Box 7780-1888 Philadelphia, PA 19182-0001 - ------------------------------------------------------------------------------- The Northern Trust Company Class R-5 24.53 FBO The Gates Corporation P.O. Box 92994 Chicago, IL 60675-2994 - ------------------------------------------------------------------------------- CGTC Tr. Capital Group Master Retirement Pl. Class R-5 38.05 PX-2534-NAV c/o Capital Guardian Trust Co. 333 S. Hope St., Fl. 49 Los Angeles, CA 90071-1406 - ------------------------------------------------------------------------------- CGTC Tr. for Capital Group 401(K) Plan Class R-5 5.19 c/o Capital Guardian Trust Co. 333 S. Hope St., Fl. 49 Los Angeles, CA 90071-1406 - -------------------------------------------------------------------------------
Fundamental Investors - Page 13 [This page is intentionally left blank for this filing.] Fundamental Investors - Page 14 INVESTMENT ADVISER - The investment adviser, Capital Research and Management Company, founded in 1931, maintains research facilities in the United States and abroad (Los Angeles, San Francisco, New York, Washington, D.C., London, Geneva, Hong Kong, Singapore and Tokyo) with a staff of professionals, many of whom have significant investment experience. The investment adviser is located at 333 South Hope Street, Los Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821. The investment adviser's research professionals travel several million miles a year, making more than 5,000 research visits in more than 50 countries around the world. The investment adviser believes that it is able to attract and retain quality personnel. The investment adviser is a wholly owned subsidiary of The Capital Group Companies, Inc. The investment adviser is responsible for managing more than $500 billion of stocks, bonds and money market instruments and serves over 20 million shareholder accounts of all types throughout the world. These investors include individuals, privately owned businesses and large corporations as well as schools, colleges, foundations and other non-profit and tax-exempt organizations. INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and Service Agreement (the "Agreement") between the fund and the investment adviser will continue in effect until August 31, 2005, unless sooner terminated, and may be renewed from year to year thereafter, provided that any such renewal has been specifically approved at least annually by: (i) the Board of Directors, or by the vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the fund, and (ii) the vote of a majority of Directors who are not parties to the Agreement or interested persons (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Agreement provides that the investment adviser has no liability to the fund for its acts or omissions in the performance of its obligations to the fund not involving willful misconduct, bad faith, gross negligence or reckless disregard of its obligations under the Agreement. The Agreement also provides that either party has the right to terminate it, without penalty, upon 60 days' written notice to the other party, and that the Agreement automatically terminates in the event of its assignment (as defined in the 1940 Act). In considering the renewal of the Agreement each year, the Contracts Committee of the Board of Directors evaluates information provided by the investment adviser in accordance with Section 15(c) of the 1940 Act, and presents its recommendations to the full Board of Directors. In approving the renewal of the Agreement for the current period, the Committee gave consideration to a wide variety of factors, including, among others the high quality of the services provided by the investment adviser, the financial strength and stability of the investment adviser, the generally excellent relative investment results of the fund, the overall reasonableness of the management fees and comparative expense ratios of the fund, the depth, quality and integrity of the investment adviser and its personnel and its longstanding commitment to excellence. Based on their review, the Committee and the Board concluded that the advisory fees and expenses of the fund are fair, both absolutely and in comparison with those of other funds in the industry, and that shareholders have received reasonable value in return for paying fees and expenses. The investment adviser, in addition to providing investment advisory services, furnishes the services and pays the compensation and travel expenses of persons to perform the fund's executive, administrative, clerical and bookkeeping functions, and provides suitable office space, necessary small office equipment and utilities, general purpose accounting forms, supplies, and Fundamental Investors - Page 15 postage used at the fund's offices. The fund pays all expenses not assumed by the investment adviser, including, but not limited to: custodian, stock transfer and dividend disbursing fees and expenses; shareholder recordkeeping and administrative expenses; costs of the designing, printing and mailing of reports, prospectuses, proxy statements, and notices to its shareholders; taxes; expenses of the issuance and redemption of fund shares (including stock certificates, registration and qualification fees and expenses); expenses pursuant to the fund's Plans of Distribution (described below); legal and auditing expenses; compensation, fees and expenses paid to Directors unaffiliated with the investment adviser; association dues; costs of stationery and forms prepared exclusively for the fund; and costs of assembling and storing shareholder account data. As compensation for its services, the investment adviser receives a monthly fee which is based on average daily net assets and is calculated at an annual rate of 0.39% on the first $1 billion of the fund's net assets, plus 0.336% on net assets over $1 billion to $2 billion, plus 0.30% on net assets over $2 billion to $3 billion, plus 0.276% on net assets over $3 billion to $5 billion, plus 0.27% on net assets over $5 billion to $8 billion, plus 0.258% on net assets over $8 billion to $13 billion, plus 0.252% on net assets over $13 billion to $17 billion, plus 0.250% on net assets over $17 billion to $21 billion, plus 0.245% on net assets over $21 billion to $27 billion, plus 0.240% on net assets over $27 billion. In connection with the approval of the Agreement by the fund's Board of Directors, the investment adviser has agreed to waive any fees to the extent they would exceed those payable under the rate structure contained in its previous agreement. The fee structure referenced above is lower than that in the previous agreement except in the event that the fund's net assets were to fall below $8 billion when fees are equal to, or higher than, that in the previous agreement. The Agreement provides for a management fee reduction to the extent that the annual ordinary operating expenses of the fund's Class A shares exceed 1% of the average net assets in excess thereof. Expenses which are not subject to these limitations are interest, taxes and extraordinary expenses. Expenditures, including costs incurred in connection with the purchase or sale of portfolio securities, which are capitalized in accordance with generally accepted accounting principles applicable to investment companies, are accounted for as capital items and not as expenses. To the extent the fund's management fee must be waived due to Class A share expense ratios exceeding the expense limitations described above, management fees will be reduced similarly for all classes of shares of the fund, or other Class A fees will be waived in lieu of management fees. For the fiscal years ended December 31, 2003, 2002 and 2001, the investment adviser received from the fund advisory fees of $48,382,000, $51,014,000 and $54,760,000, respectively. Effective for the period from September 1, 2004 until August 31, 2005, the investment adviser has agreed to waive 5% of the management fees that it is otherwise entitled to receive under the Agreement. As a result of this waiver, management fees will be reduced similarly for all classes of shares of the fund. ADMINISTRATIVE SERVICES AGREEMENT - The Administrative Services Agreement (the "Administrative Agreement") between the fund and the investment adviser relating to the fund's R share classes will continue in effect until August 31, 2005, unless sooner terminated, and may be renewed from year to year thereafter, provided that any such renewal has been specifically approved at least annually by the vote of a majority of Directors who are not parties to the Fundamental Investors - Page 16 Administrative Agreement or interested persons (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of voting on such approval. The Administrative Agreement provides that the fund may terminate the agreement at any time by vote of a majority of Directors who are not interested persons of the fund. The investment adviser has the right to terminate the Administrative Agreement upon 60 days' written notice to the fund. The Administrative Agreement automatically terminates in the event of its assignment (as defined in the 1940 Act). Under the Administrative Agreement, the investment adviser provides certain transfer agent and administrative services for shareholders of the fund's R share classes. The investment adviser contracts with third parties, including American Funds Service Company, the fund's Transfer Agent, to provide these services. Services include, but are not limited to, shareholder account maintenance, transaction processing, tax information reporting and shareholder and fund communications. In addition, the investment adviser monitors, coordinates and oversees the activities performed by third parties providing such services. During the start-up period for Class R-1, R-2, R-3 and R-4 shares, the investment adviser agreed to pay a portion of these fees. For the year ended December 31, 2003, the total fees paid by the investment adviser were $126,000. As compensation for its services, the investment adviser receives transfer agent fees for transfer agent services provided to the fund's applicable share classes. Transfer agent fees are paid monthly according to a fee schedule contained in a Shareholder Services Agreement between the fund and American Funds Service Company. The investment adviser also receives an administrative services fee for administrative services provided to the fund's applicable share classes. Administrative services fees are paid monthly, accrued daily and calculated at the annual rate of 0.15% of the average daily net assets for each R share class except Class R-5 shares. For Class R-5 shares, the administrative fee is paid monthly, accrued daily and calculated at the annual rate of 0.10% of the average daily net assets of Class R-5 shares. During the 2003 fiscal period, administrative services fees, gross of any payments made by the investment adviser, were:
ADMINISTRATIVE SERVICES FEE - ------------------------------------------------------------------------------------- CLASS R-1 $ 3,000 - ------------------------------------------------------------------------------------- CLASS R-2 217,000 - ------------------------------------------------------------------------------------- CLASS R-3 116,000 - ------------------------------------------------------------------------------------- CLASS R-4 41,000 - ------------------------------------------------------------------------------------- CLASS R-5 72,000 - -------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER AND PLANS OF DISTRIBUTION - American Funds Distributors, Inc. (the "Principal Underwriter") is the principal underwriter of the fund's shares. The Principal Underwriter is located at 333 South Hope Street, Los Angeles, CA 90071; 135 South State College Boulevard, Brea, CA 92821; 3500 Wiseman Boulevard, San Antonio, TX 78251; 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240; and 5300 Robin Hood Road, Norfolk, VA 23513. Fundamental Investors - Page 17 The Principal Underwriter receives revenues from sales of the fund's shares. For Class A shares, the Principal Underwriter receives commission revenue consisting of that portion of the Class A sales charge remaining after the allowances by the Principal Underwriter to investment dealers. For Class R-1, R-2, R-3 and R-4 shares, the fund pays the Principal Underwriter for advancing the immediate service fees paid to qualified dealers and advisers who sell the shares. Commissions, revenue or service fees retained by the Principal Underwriter after allowances or compensation to dealers were:
COMMISSIONS, ALLOWANCE OR REVENUE COMPENSATION FISCAL YEAR OR FEES RETAINED TO DEALERS - ---------------------------------------------------------------------------------------------------- CLASS A 2003 $ 5,197,000 $24,084,000 2002 7,494,000 35,357,000 2001 13,443,000 61,508,000 - ----------------------------------------------------------------------------------------------------
The fund has adopted Plans of Distribution (the "Plans") pursuant to rule 12b-1 under the 1940 Act. The Principal Underwriter receives amounts payable pursuant to the Plans (see below). As required by rule 12b-1 and the 1940 Act, the Plans (together with the Principal Underwriting Agreement) have been approved by the full Board of Directors and separately by a majority of the Directors who are not "interested persons" of the fund and who have no direct or indirect financial interest in the operation of the Plans or the Principal Underwriting Agreement. Potential benefits of the Plans to the fund include: quality shareholder services; savings to the fund in transfer agency costs; benefits to the investment process from growth or stability of assets; and maintenance of a financially healthy management organization. The selection and nomination of Directors who are not "interested persons" of the fund are committed to the discretion of the Directors who are not "interested persons" during the existence of the Plans. The Plans may not be amended to increase materially the amount spent for distribution without shareholder approval. Plan expenses are reviewed quarterly and the Plans must be renewed annually by the Board of Directors. Under the Plans, the fund may annually expend the following amounts to finance any activity primarily intended to result in the sale of fund shares, provided the fund's Board of Directors has approved the category of expenses for which payment is being made: (i) for Class A shares, up to .25% of the average daily net assets attributable to Class A shares; (ii) for Class R-1 shares, 1.00% of the average daily net assets attributable to Class R-1 shares; (iii) for Class R-2 shares, up to 1.00% of the average daily net assets attributable to Class R-2 shares; (iv) for Class R-3 shares, up to 0.75% of the average daily net assets attributable to Class R-3 shares; and (v) for Class R-4 shares, up to 0.50% of its average daily net assets attributable to Class R-4 shares. The fund has not adopted a Plan for Class R-5 shares; accordingly, no 12b-1 fees are paid from Class R-5 share assets. For Class A shares: (i) up to 0.25% is reimbursed to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) up to the amount allowable under the fund's Class A 12b-1 limit is reimbursed to the Principal Underwriter for paying distribution-related expenses, including for Class A shares dealer commissions and wholesaler compensation paid on sales of shares of $1 million or more purchased without a Fundamental Investors - Page 18 sales charge (including purchases by employer-sponsored defined contribution-type retirement plans investing $1 million or more or with 100 or more eligible employees, and retirement plans, endowments and foundations with $50 million or more in assets) ("no load purchases"). Commissions on no load purchases of Class A shares, in excess of the Class A Plan limitations not reimbursed to the Principal Underwriter during the most recent fiscal quarter are recoverable for five quarters, provided that such commissions do not exceed the annual expense limit. After five quarters these commissions are not recoverable. For Class R-1 shares: (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.75% is paid to the Principal Underwriter for distribution-related expenses, including the financing of commissions paid to qualified dealers. For Class R-2 shares: currently (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.50% is paid to the Principal Underwriter for paying distribution-related expenses, including commissions paid to qualified dealers. For Class R-3 shares: currently (i) 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers, and (ii) 0.25% is paid to the Principal Underwriter for paying distribution-related expenses, including commissions paid to qualified dealers. For Class R-4 shares, currently 0.25% is paid to the Principal Underwriter for paying service-related expenses, including paying service fees to qualified dealers or advisers. During the 2003 fiscal year, 12b-1 expenses accrued and paid, and if applicable, unpaid, were:
12B-1 LIABILITY 12B-1 EXPENSES OUTSTANDING - ------------------------------------------------------------------------------ CLASS A $38,778,000 $3,232,000 - ------------------------------------------------------------------------------ CLASS R-1 9,000 2,000 - ------------------------------------------------------------------------------ CLASS R-2 182,000 27,000 - ------------------------------------------------------------------------------ CLASS R-3 190,000 26,000 - ------------------------------------------------------------------------------ CLASS R-4 63,000 10,000 - ------------------------------------------------------------------------------
OTHER COMPENSATION TO DEALERS - American Funds Distributors, at its expense, currently provides additional compensation to investment dealers. These payments may be made, at the discretion of American Funds Distributors, to the top 75 dealers who have sold shares of the American Funds. The level of payments made to a qualifying dealer in any given year will vary and in no case would exceed the sum of (a) 0.10% of the previous year's fund sales by that dealer and (b) 0.02% of assets attributable to that dealer. For 2004, aggregate payments made by American Funds Distributors to dealers will equal approximately 0.02% of the assets of the American Funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates and, the quality of the dealer's relationship with American Funds Distributors. American Funds Distributors makes these payments to help Fundamental Investors - Page 19 defray the costs incurred by qualifying dealers in connection with efforts to educate financial advisers about the American Funds so that they can make recommendations and provide services that are suitable and meet shareholder needs. American Funds Distributors will, on an annual basis, determine the advisability of continuing these payments. American Funds Distributors may also pay expenses associated with meetings that facilitate educating financial advisers and shareholders about the American Funds that are conducted by dealers outside the top 75 firms. As of January 2004, the top dealers that American Funds Distributors anticipates will receive additional compensation include: 1717 Capital Management Company A. G. Edwards & Sons, Inc. AIG/SunAmerica Group American General/Franklin Financial Ameritas/The Advisors Group AXA Advisors, LLC Baird/NMIS Group Cadaret, Grant & Co., Inc. Cambridge Investment Research, Inc. Capital Analysts, Inc. Commonwealth Financial Network Cuna Brokerage Services, Inc. Deutsche Bank Securities Inc. Edward Jones Ferris, Baker Watts, Inc. GE Independent Accountant Network Hefren-Tillotson, Inc. Hornor, Townsend & Kent, Inc. ING Advisors Network InterSecurities, Inc. Investacorp, Inc. Janney Montgomery Scott LLC Jefferson Pilot Securities Corporation JJB Hilliard/PNC Bank Legg Mason Wood Walker, Inc. Lincoln Financial Advisors Corporation Linsco/Private Ledger Corp. McDonald Investments/Society National Bank Merrill Lynch, Pierce, Fenner & Smith Inc. Metlife Enterprises MML Investors Services, Inc. Morgan Keegan & Company, Inc. NatCity Investment, Inc. National Planning Holdings NFP Securities, Inc. PacLife Group Park Avenue Securities LLC Princor/PPI ProEquities, Inc. Fundamental Investors - Page 20 Raymond James Group RBC Dain Rauscher Inc. Securian/C.R.I. Securities Service Network Inc. Signator Investors, Inc. Smith Barney Stifel, Nicolaus & Company, Inc. The O.N. Equity Sales Company UBS Financial Services Inc. US Bancorp Piper Jaffray Group Wachovia Group WS Griffith Securities, Inc. TAXES AND DISTRIBUTIONS FUND TAXATION - The fund has elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code"). A regulated investment company qualifying under Subchapter M of the Code is required to distribute to its shareholders at least 90% of its investment company taxable income (including the excess of net short-term capital gain over net long-term capital losses) and generally is not subject to federal income tax to the extent that it distributes annually 100% of its investment company taxable income and net realized capital gains in the manner required under the Code. The fund intends to distribute annually all of its investment company taxable income and net realized capital gains and therefore does not expect to pay federal income tax, although in certain circumstances, the fund may determine that it is in the interest of shareholders to distribute less than that amount. To be treated as a regulated investment company under Subchapter M of the Code, the fund must also (a) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to the business of investing in such securities or currencies, and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the fund's assets is represented by cash, U.S. government securities and securities of other regulated investment companies, and other securities (for purposes of this calculation, generally limited in respect of any one issuer, to an amount not greater than 5% of the market value of the fund's assets and 10% of the outstanding voting securities of such issuer) and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), or two or more issuers which the fund controls and which are determined to be engaged in the same or similar trades or businesses. Under the Code, a nondeductible excise tax of 4% is imposed on the excess of a regulated investment company's "required distribution" for the calendar year ending within the regulated investment company's taxable year over the "distributed amount" for such calendar year. The term "required distribution" means the sum of (i) 98% of ordinary income (generally net investment income) for the calendar year, (ii) 98% of capital gain (both long-term and short-term) for the one-year period ending on October 31 (as though the one-year period ending on October 31 were the regulated investment company's taxable year), and (iii) the sum of any untaxed, undistributed net investment income and net capital gains of the regulated investment company for prior periods. The term "distributed amount" generally means the sum of (i) amounts actually Fundamental Investors - Page 21 distributed by the fund from its current year's ordinary income and capital gain net income and (ii) any amount on which the fund pays income tax during the periods described above. Although the fund intends to distribute its net investment income and net capital gains so as to avoid excise tax liability, the fund may determine that it is in the interest of shareholders to distribute a lesser amount. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS - Dividends and capital gain distributions on fund shares will be reinvested in shares of the fund of the same class. Dividends and capital gains distributed by the fund to a retirement plan currently are not taxable. DIVIDENDS - The fund intends to follow the practice of distributing substantially all of its investment company taxable income, which includes any excess of net realized short-term gains over net realized long-term capital losses. Investment company taxable income generally includes dividends, interest, net short-term capital gains in excess of net long-term capital losses, and certain foreign currency gains, if any, less expenses and certain foreign currency losses. To the extent the fund invests in stock of domestic and certain foreign corporations, it may receive "qualified dividends". The fund will designate the amount of "qualified dividends" to its shareholders in a notice sent within 60 days of the close of its fiscal year and will report "qualified dividends" to shareholders on Form 1099-DIV. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time the fund accrues receivables or liabilities denominated in a foreign currency and the time the fund actually collects such receivables, or pays such liabilities, generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain futures contracts, forward contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition are also treated as ordinary gain or loss. These gains or losses, referred to under the Code as "Section 988" gains or losses, may increase or decrease the amount of the fund's investment company taxable income to be distributed to its shareholders as ordinary income. If the fund invests in stock of certain passive foreign investment companies, the fund may be subject to U.S. federal income taxation on a portion of any "excess distribution" with respect to, or gain from the disposition of, such stock. The tax would be determined by allocating such distribution or gain ratably to each day of the fund's holding period for the stock. The distribution or gain so allocated to any taxable year of the fund, other than the taxable year of the excess distribution or disposition, would be taxed to the fund at the highest ordinary income rate in effect for such year, and the tax would be further increased by an interest charge to reflect the value of the tax deferral deemed to have resulted from the ownership of the foreign company's stock. Any amount of distribution or gain allocated to the taxable year of the distribution or disposition would be included in the fund's investment company taxable income and, accordingly, would not be taxable to the fund to the extent distributed by the fund as a dividend to its shareholders. To avoid such tax and interest, the fund intends to elect to treat these securities as sold on the last day of its fiscal year and recognize any gains for tax purposes at that time. Under this election, deductions for losses are allowable only to the extent of any prior recognized gains, and both gains and losses will be treated as ordinary income or loss. Fundamental Investors - Page 22 The fund will be required to distribute any resulting income, even though it has not sold the security and received cash to pay such distributions. Upon disposition of these securities, any gain recognized is treated as ordinary income and loss is treated as ordinary loss to the extent of any prior recognized gain. Dividends from domestic corporations are expected to comprise some portion of the fund's gross income. To the extent that such dividends constitute any of the fund's gross income, a portion of the income distributions of the fund may be eligible for the deduction for dividends received by corporations. Corporate shareholders will be informed of the portion of dividends which so qualify. The dividends-received deduction is reduced to the extent that either the fund shares, or the underlying shares of stock held by the fund, with respect to which dividends are received, are treated as debt-financed under federal income tax law and is eliminated if the shares are deemed to have been held by the shareholder or the fund, as the case may be, for less than 46 days during the 90-day period beginning on the date which is 45 days before the date on which the shares become ex-dividend. Capital gain distributions are not eligible for the dividends-received deduction. A portion of the difference between the issue price of zero coupon securities and their face value ("original issue discount") is considered to be income to the fund each year, even though the fund will not receive cash interest payments from these securities. This original issue discount (imputed income) will comprise a part of the investment company taxable income of the fund which must be distributed to shareholders in order to maintain the qualification of the fund as a regulated investment company and to avoid federal income taxation at the level of the fund. In addition, some of the bonds may be purchased by the fund at a discount that exceeds the original issue discount on such bonds, if any. This additional discount represents market discount for federal income tax purposes. The gain realized on the disposition of any bond having a market discount may be treated as taxable ordinary income to the extent it does not exceed the accrued market discount on such bond or a fund may elect to include the market discount in income in tax years to which it is attributable. Generally, accrued market discount may be figured under either the ratable accrual method or constant interest method. If the fund has paid a premium over the face amount of a bond, the fund has the option of either amortizing the premium until bond maturity and reducing the fund's basis in the bond by the amortized amount, or not amortizing and treating the premium as part of the bond's basis. In the case of any debt security having a fixed maturity date of not more than one year from its date of issue, the gain realized on disposition generally will be treated as a short-term capital gain. In general, any gain realized on disposition of a security held less than one year is treated as a short-term capital gain. Dividend and interest income received by the fund from sources outside the United States may be subject to withholding and other taxes imposed by such foreign jurisdictions. Tax conventions between certain countries and the United States may reduce or eliminate these foreign taxes, however. Most foreign countries do not impose taxes on capital gains in respect of investments by foreign investors. CAPITAL GAIN DISTRIBUTIONS - The fund also intends to follow the practice of distributing the entire excess of net realized long-term capital gains over net realized short-term Fundamental Investors - Page 23 capital losses. Net capital gains for a fiscal year are computed by taking into account any capital loss carry-forward of the fund. If any net long-term capital gains in excess of net short-term capital losses are retained by the fund for reinvestment, requiring federal income taxes to be paid thereon by the fund, the fund intends to elect to treat such capital gains as having been distributed to shareholders. Shareholders should consult their tax advisers about the application of federal, state and local tax law in light of their particular situation. PURCHASE, EXCHANGE AND SALE OF SHARES PURCHASES - Class A shares are generally not available for retirement plans using the PlanPremier or Recordkeeper Direct recordkeeping programs. Class R shares are generally only available to 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans, defined benefit plans, and non-qualified deferred compensation plans. Class R shares are also generally only available to retirement plans where plan level or omnibus accounts (i.e., no participant accounts) are held on the books of a fund. In addition, Class R-5 shares are generally only available to retirement plans with at least $1 million or more in plan assets. Class R shares are generally not available to retail non-retirement accounts, traditional and Roth IRAs, Coverdell Education Savings Accounts, SEPs, SAR-SEPs, SIMPLE IRAs, individual 403(b) plans and CollegeAmerica accounts. Eligible retirement plans may generally open an account and purchase Class A and R shares by contacting any investment dealer (who may impose transaction charges in addition to those described in the fund's prospectus and statement of additional information) authorized to sell the fund's shares. Additional shares may be purchased through a plan's administrator or recordkeeper. THE FUND AND THE PRINCIPAL UNDERWRITER RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER. EXCHANGES - Shares of the fund generally may be exchanged into shares of the same class of other American Funds. Exchange purchases are subject to the minimum investment requirements of the fund purchased and no sales charge generally applies. However, exchanges of Class A shares from American Funds money market funds purchased without a sales charge generally will be subject to the appropriate sales charge, unless the money market fund shares were acquired by an exchange from a fund having a sales charge. Shares may be exchanged into other American Funds by contacting your plan administrator or recordkeeper. Shares held in corporate-type retirement plans for which Capital Bank and Trust Company serves as trustee may not be exchanged by telephone, Internet, fax or telegraph. Exchange redemptions and purchases are processed simultaneously at the share prices next determined after the exchange order is received. SALES - Shares of the fund may be sold by contacting your plan administrator or recordkeeper. Shares are sold at the net asset value next determined after the request is received in good order by the Transfer Agent, dealer or any of their designees. Fundamental Investors - Page 24 Redemption proceeds will not be mailed until sufficient time has passed to provide reasonable assurance that checks or drafts (including certified or cashier's checks) for shares purchased have cleared (which may take up to 15 calendar days from the purchase date). Except for delays relating to clearance of checks for share purchases or in extraordinary circumstances (and as permissible under the 1940 Act), sale proceeds will be paid on or before the seventh day following receipt and acceptance of an order. Interest will not accrue or be paid on amounts that represent uncashed distribution or redemption checks. If you notify the Transfer Agent, you may reinvest proceeds from a redemption, dividend payment or capital gain distribution without a sales charge in any of the American Funds within 90 days after the date of the redemption or distribution. Proceeds will be reinvested in the same share class from which the original redemption or distribution was made. Redemption proceeds of Class A shares representing direct purchases in the money market funds that are reinvested in non-money market funds will be subject to a sales charge. Proceeds will be reinvested at the next calculated net asset value after the request is received and accepted by the Transfer Agent. You may not reinvest proceeds in the American Funds as described in this paragraph if the reinvestment otherwise triggers a purchase block as described under "Frequent trading of fund shares." FREQUENT TRADING OF FUND SHARES -- As noted in the prospectus, beginning on January 12, 2005, certain redemptions may trigger a purchase block lasting 30 calendar days. The following transactions are exempt from this general purchase block policy: . Systematic redemptions (e.g., regular periodic automatic redemptions), where the entity maintaining the shareholder account is able to identify the transaction as a systematic redemption, will not result in future purchases being prevented. . Purchases (including purchases that are part of an exchange transaction) of shares having a value of less than $5,000 will not be prevented. . Systematic purchases (e.g., regular periodic automatic transactions, automatic reinvestments of dividends and capital gain distributions, and Statement of Intention escrow share redemptions), where the entity maintaining the shareholder account is able to identify the transaction as a systematic purchase, will not be prevented. Purchase transactions involving transfers of assets, rollovers, Roth IRA conversions and IRA re-characterizations will not be prevented. OTHER POTENTIALLY ABUSIVE ACTIVITY -- In addition to implementing purchase blocks, American Funds Service Company will monitor for other types of activity that could potentially be harmful to the American Funds - for example, short-term trading activity in multiple funds. When identified, American Funds Service Company will request that the shareholder discontinue the activity. If the activity continues, American Funds Service Company will freeze the shareholder account to prevent all activity other than redemptions of fund shares. FUND NUMBERS - Here are the fund numbers for use when making share transactions:
FUND NUMBERS ------------------------------------------ CLASS CLASS CLASS CLASS CLASS CLASS FUND A R-1 R-2 R-3 R-4 R-5 - -------------------------------------------------------------------------------------------------------------------------- STOCK AND STOCK/BOND FUNDS AMCAP Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 002 2102 2202 2302 2402 2502 American Balanced Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . 011 2111 2211 2311 2411 2511 American Mutual Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . 003 2103 2203 2303 2403 2503 Capital Income Builder/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . 012 2112 2212 2312 2412 2512 Capital World Growth and Income Fund/SM/ . . . . . . . . . . . . . . . . . . 033 2133 2233 2333 2433 2533 EuroPacific Growth Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . 016 2116 2216 2316 2416 2516 Fundamental Investors/SM/ . . . . . . . . . . . . . . . . . . . . . . . . . . 010 2110 2210 2310 2410 2510 The Growth Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 005 2105 2205 2305 2405 2505 The Income Fund of America/(R)/ . . . . . . . . . . . . . . . . . . . . . . . 006 2106 2206 2306 2406 2506 The Investment Company of America/(R)/ . . . . . . . . . . . . . . . . . . . 004 2104 2204 2304 2404 2504 The New Economy Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . 014 2114 2214 2314 2414 2514 New Perspective Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . 007 2107 2207 2307 2407 2507 New World Fund/SM/ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 036 2136 2236 2336 2436 2536 SMALLCAP World Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . . . 035 2135 2235 2335 2435 2535 Washington Mutual Investors Fund/SM/ . . . . . . . . . . . . . . . . . . . . 001 2101 2201 2301 2401 2501 BOND FUNDS American High-Income Municipal Bond Fund/(R)/ . . . . . . . . . . . . . . . . 040 N/A N/A N/A N/A 2540 American High-Income Trust/SM/ . . . . . . . . . . . . . . . . . . . . . . . 021 2121 2221 2321 2421 2521 The Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . . . . . . . . 008 2108 2208 2308 2408 2508 Capital World Bond Fund/(R)/ . . . . . . . . . . . . . . . . . . . . . . . . 031 2131 2231 2331 2431 2531 Intermediate Bond Fund of America/SM/ . . . . . . . . . . . . . . . . . . . . 023 2123 2223 2323 2423 2523 Limited Term Tax-Exempt Bond Fund of America/SM/ . . . . . . . . . . . . . . 043 N/A N/A N/A N/A 2543 The Tax-Exempt Bond Fund of America/(R)/ . . . . . . . . . . . . . . . . . . 019 N/A N/A N/A N/A 2519 The Tax-Exempt Fund of California/(R)/* . . . . . . . . . . . . . . . . . . . 020 N/A N/A N/A N/A 2520 The Tax-Exempt Fund of Maryland/(R)/* . . . . . . . . . . . . . . . . . . . . 024 N/A N/A N/A N/A 2524 The Tax-Exempt Fund of Virginia/(R)/* . . . . . . . . . . . . . . . . . . . . 025 N/A N/A N/A N/A 2525 U.S. Government Securities Fund/SM/ . . . . . . . . . . . . . . . . . . . . . 022 2122 2222 2322 2422 2522 MONEY MARKET FUNDS The Cash Management Trust of America/(R)/ . . . . . . . . . . . . . . . . . . 009 2109 2209 2309 2409 2509 The Tax-Exempt Money Fund of America/SM/ . . . . . . . . . . . . . . . . . . 039 N/A N/A N/A N/A 2539 The U.S. Treasury Money Fund of America/SM/ . . . . . . . . . . . . . . . . . 049 2149 2249 2349 2449 2549 ___________ *Available only in certain states.
Fundamental Investors - Page 25 SALES CHARGES CLASS A SALES CHARGES - The sales charges you pay when purchasing Class A shares of stock, stock/bond and bond funds of the American Funds are set forth below. American Funds money market funds are offered at net asset value. (See "Fund Numbers" above for a listing of the funds.) Fundamental Investors - Page 26
DEALER SALES CHARGE AS COMMISSION PERCENTAGE OF THE: AS PERCENTAGE ------------------ OF THE AMOUNT OF PURCHASE AT THE OFFERING PRICE NET AMOUNT OFFERING OFFERING -INVESTED- PRICE PRICE - ------------------------------------------- -------- ----- ----- STOCK AND STOCK/BOND FUNDS Less than $25,000 . . . . . . . . . 6.10% 5.75% 5.00% $25,000 but less than $50,000. . . 5.26 5.00 4.25 $50,000 but less than $100,000. . 4.71 4.50 3.75 BOND FUNDS Less than $100,000 . . . . . . . . 3.90 3.75 3.00 STOCK, STOCK/BOND, AND BOND FUNDS $100,000 but less than $250,000 . 3.63 3.50 2.75 $250,000 but less than $500,000 . 2.56 2.50 2.00 $500,000 but less than $750,000 . 2.04 2.00 1.60 $750,000 but less than $1 million 1.52 1.50 1.20 $1 million or more . . . . . . . . none none see below - --------------------------------------------------------------------------------
The initial sales charge paid by you on investments in Class A shares, expressed as a percentage of the offering price or the net amount invested, may be higher or lower than the percentages described in the table above due to rounding. This is because the dollar amount of the sales charge is determined by subtracting the net asset value of the shares purchased from the offering price, which is calculated to two decimal places using standard rounding criteria. The impact of rounding will vary with the size of the investment and the net asset value of the shares. CLASS A PURCHASES NOT SUBJECT TO SALES CHARGES - Investments of $1 million or more are sold with no initial sales charge. The following investments are not subject to any initial sales charge if American Funds Service Company is notified: . investments made by accounts that are part of certain qualified fee-based programs and that purchased Class A shares before March 15, 2001; and . Individual Retirement Account rollovers involving retirement plan assets invested in the American Funds (this particular exception will no longer be available beginning February 1, 2005). A dealer concession of up to 1% may be paid by the fund under its Class A Plan of Distribution to reimburse the Principal Underwriter in connection with dealer and wholesaler compensation paid by it with respect to investments made with no initial sales charge. Fundamental Investors - Page 27 EMPLOYER-SPONSORED RETIREMENT PLANS ON OR BEFORE MARCH 31, 2004: An employer-sponsored retirement plan (including certain 403(b) plans) may invest in Class A shares without any initial sales charge if the plan invests $1 million or more, or if American Funds Service Company is notified that the plan has 100 or more eligible employees or has $50 million or more in assets. Plans investing in this manner may continue to purchase Class A shares without any initial sales charge after March 31, 2004. 403(b) plans may be treated as employer-sponsored plans for sales charge purposes if: (i) the American Funds are principal investment options; (ii) the employer facilitates the enrollment process by, for example, allowing for onsite group enrollment meetings held during working hours; and (iii) there is only one dealer firm assigned to the plans. AFTER MARCH 31, 2004: . Employer-sponsored retirement plans not yet invested in Class A shares and wishing to invest without a sales charge will no longer be eligible to purchase Class A shares. Such plans may invest only in Class R shares. . Provided that the plan's recordkeeper can properly apply a sales charge on the plan's investments, an employer-sponsored retirement plan not yet invested in Class A shares and wishing to invest less than $1 million may invest in Class A shares, but the purchase of these shares will be subject to the applicable sales charge, regardless of whether the plan has 100 or more eligible employees or whether it has $50 million or more in assets. An employer-sponsored retirement plan that purchases Class A shares with a sales charge will be eligible to purchase additional Class A shares in accordance with the sales charge table above. If the recordkeeper cannot properly apply a sales charge on the plan's investments, then the plan may invest only in Class R shares. . Employer-sponsored retirement plans not yet invested in Class A shares will no longer be eligible to establish a statement of intention to purchase $1 million or more of American Funds shares in order to qualify to purchase without a sales charge. More information about statements of intention can be found under "Class A Sales Charge Reductions." OTHER PURCHASES Pursuant to a determination of eligibility by a vice president or more senior officer of the Capital Research and Management Company Fund Administration Unit, or by his or her designee, Class A shares of the American Funds stock, stock/bond and bond funds may be sold at net asset value to: (1) current or retired directors, trustees, officers and advisory board members of, and certain lawyers who provide services to, the funds managed by Capital Research and Management Company, current or retired employees of Washington Management Corporation, current or retired employees and partners of The Capital Group Companies, Inc. and its affiliated com- Fundamental Investors - Page 28 panies, certain family members and employees of the above persons, and trusts or plans primarily for such persons; (2) current registered representatives and assistants directly employed by such representatives, retired registered representatives with respect to accounts established while active, or full-time employees (and their spouses, parents, and children) of dealers who have sales agreements with the Principal Underwriter (or who clear transactions through such dealers) and plans for such persons or the dealers; (3) current registered investment advisers registered with the Principal Underwriter and assistants directly employed by such registered investment advisers, retired registered investment advisers with respect to accounts established while active, or full-time employees of registered investment advisers registered with the Principal Underwriter (and their spouses, parents and children), and plans for such persons; (4) companies exchanging securities with the fund through a merger, acquisition or exchange offer; (5) insurance company separate accounts; (6) accounts managed by subsidiaries of The Capital Group Companies, Inc.; (7) The Capital Group Companies, Inc., its affiliated companies and Washington Management Corporation; (8) an individual or entity with a substantial business relationship with The Capital Group Companies, Inc. or its affiliates, or an individual or entity related or relating to such individual or entity; (9) wholesalers and full-time employees directly supporting wholesalers involved in the distribution of insurance company separate accounts whose underlying investments are managed by any affiliate of The Capital Group Companies, Inc.; and (10) full-time employees of banks that have sales agreements with the Principal Underwriter, who are solely dedicated to supporting the sale of mutual funds. Shares are offered at net asset value to these persons and organizations due to anticipated economies in sales effort and expense. Once an account is established under this net asset value privilege, additional investments can be made at net asset value for the life of the account. DEALER COMMISSIONS AND COMPENSATION - For Class A shares, commissions (up to 1%) are paid to dealers who initiate and are responsible for purchases of $1 million or more, for purchases by any employer-sponsored defined contribution-type plan investing $1 million or more or with 100 or more eligible employees, IRA rollover accounts of $1 million or more, and for purchases made at net asset value by certain retirement plans with assets of $50 million or more. Commissions on investments in Class A shares are paid at the following rates: 1.00% on amounts to $4 million, 0.50% on amounts over $4 million to $10 million, and 0.25% on amounts over $10 million. Commissions are based on cumulative investments and are not annually reset. Fundamental Investors - Page 29 For Class R-1 shares, annual asset-based compensation of 1.00% is paid by the Principal Underwriter to dealers who sell Class R-1 shares. For Class R-2 shares, annual asset-based compensation of 0.75% is paid by the Principal Underwriter to dealers who sell Class R-2 shares. For Class R-3 shares, annual asset-based compensation of 0.50% is paid by the Principal Underwriter to dealers who sell Class R-3 shares. For Class R-4 shares, annual asset-based compensation of 0.25% is paid by the Principal Underwriter to dealers who sell Class R-4 shares. No dealer compensation is paid on sales of Class R-5 shares. The fund has not adopted a plan for Class R-5 shares; accordingly no 12b-1 fee is paid from Class R-5 assets. CLASS A SALES CHARGE REDUCTIONS REDUCING YOUR CLASS A SALES CHARGE - You must let your investment dealer or American Funds Service Company (the "Transfer Agent") know at the time you purchase shares if you qualify for a reduction in your sales charge using one or any combination of the methods described below. STATEMENT OF INTENTION - You may enter into a non-binding commitment to purchase shares of the American Funds over a 13-month period and receive the same sales charge as if all shares had been purchased at once. This includes purchases made during the previous 90 days, but does not include future appreciation of your investment or reinvested distributions. The reduced sales charges and offering prices set forth in the Prospectus apply to purchases of $25,000 or more for equity funds and $100,000 or more for bond funds made within a 13-month period subject to a statement of intention (the "Statement"). The Statement is not a binding obligation to purchase the indicated amount. After March 31, 2004, employer-sponsored retirement plans not yet invested in Class A shares will no longer be eligible to establish a Statement to purchase $1 million or more without a sales charge. When a shareholder elects to use a Statement in order to qualify for a reduced sales charge on purchases of the American Funds, shares equal to 5% of the dollar amount specified in the Statement will be held in escrow in the shareholder's account out of the initial purchase (or subsequent purchases, if necessary) by the Transfer Agent. All dividends and any capital gain distributions on shares held in escrow will be credited to the shareholder's account in shares (or paid in cash, if requested). If the intended investment is not completed within the specified 13-month period, the purchaser will remit to the Principal Underwriter the difference between the sales charge actually paid and the sales charge which would have been paid if the total of such purchases had been made at a single time. The dealer assigned to the account at the end of the period will receive an appropriate commission adjustment. If the difference is not paid by the close of the Statement period, the appropriate number of shares held in escrow will be redeemed to pay such difference. If the proceeds from this redemption are inadequate, the purchaser will be liable to the Principal Underwriter for the balance still outstanding. Fundamental Investors - Page 30 The Statement may be revised upward at any time during the 13-month period, and such a revision will be treated as a new Statement, except that the 13-month period during which the purchase must be made will remain unchanged. Accordingly, upon your request, the sales charge paid on investments made 90 days prior to the Statement revision will be adjusted to reflect the revised Statement. Existing holdings eligible for rights of accumulation (see below), including holdings in Endowments (shares of which may be owned only by tax-exempt organizations) may be credited toward satisfying the Statement. During the Statement period, reinvested dividends and capital gain distributions, investments in money market funds, and investments made under a right of reinstatement will not be credited toward satisfying the Statement. The Statement will be considered completed if the shareholder dies within the 13-month Statement period. Commissions will not be adjusted or paid on the difference between the Statement amount and the amount actually invested before the shareholder's death. When the trustees of certain retirement plans purchase shares by payroll deduction, the sales charge for the investments made during the 13-month period will be handled as follows: the total monthly investment will be multiplied by 13 and then multiplied by 1.5. The current value of existing American Funds investments (other than money market fund investments) and any rollovers or transfers reasonably anticipated to be invested in non-money market American Funds during the 13-month period are added to the figure determined above. The sum is the Statement amount and applicable breakpoint level. On the first investment and all other investments made pursuant to the Statement, a sales charge will be assessed according to the sales charge breakpoint thus determined. There will be no retroactive adjustments in sales charges on investments made during the 13-month period. Shareholders purchasing shares at a reduced sales charge under a Statement indicate their acceptance of these terms with their first purchase. AGGREGATION - Sales charge discounts are available for certain aggregated investments. Individual purchases by a trustee(s) or other fiduciary(ies) may be aggregated if the investments are: . for a fiduciary account, including employee benefit plans other than individual-type employee benefit plans, such as an IRA, 403(b) plan (except as described below), or single-participant Keogh-type plan; . made for two or more employee benefit plans of a single employer or of affiliated employers as defined in the 1940 Act, again excluding individual-type employee benefit plans described above; or . for participant accounts of a 403(b) plan that is treated as an employer-sponsored plan (see "Class A Purchases Not Subject to Sales Charges" above), or made for two or more 403(b) plans that are treated as employer-sponsored plans of a single employer or affiliated employers as defined in the 1940 Act. Purchases made for nominee or street name accounts (securities held in the name of an investment dealer or another nominee such as a bank trust department instead of the Fundamental Investors - Page 31 customer) may not be aggregated with those made for other accounts and may not be aggregated with other nominee or street name accounts unless otherwise qualified as described above. CONCURRENT PURCHASES - You may combine purchases of all classes of shares of two or more funds in the American Funds, as well as individual holdings in Endowments. Shares of money market funds purchased through an exchange, reinvestment or cross-reinvestment from a fund having a sales charge also qualify. However, direct purchases of the money market funds are excluded. RIGHTS OF ACCUMULATION - Subject to the limitations described in the aggregation policy, you may take into account the current value of your existing holdings in all share classes of the American Funds, as well as your holdings in Endowments, to determine your sales charge on investments in accounts eligible to be aggregated, or when making a gift to an individual or charity. When determining your sales charge, you may also take into account the current value of your investment in American Legacy Retirement Investment Plan. Direct purchases of American Funds money market funds are excluded. PRICE OF SHARES Shares are purchased at the offering price or sold at the net asset value price next determined after the purchase or sell order is received and accepted by the fund or the Transfer Agent; the offering or net asset value price is effective for orders received prior to the time of determination of the net asset value and, in the case of orders placed with dealers or their authorized designees, accepted by the Principal Underwriter, the Transfer Agent, a dealer or any of their designees. In the case of orders sent directly to the fund or the Transfer Agent, an investment dealer MUST be indicated. The dealer is responsible for promptly transmitting purchase and sell orders to the Principal Underwriter. Orders received by the investment dealer or authorized designee, the Transfer Agent, or the fund after the time of the determination of the net asset value will be entered at the next calculated offering price. Note that investment dealers or other intermediaries may have their own rules about share transactions and may have earlier cut-off times than those of the fund. For more information about how to purchase through your intermediary, contact your intermediary directly. Prices that appear in the newspaper do not always indicate prices at which you will be purchasing and redeeming shares of the fund, since such prices generally reflect the previous day's closing price whereas purchases and redemptions are made at the next calculated price. The price you pay for shares, the offering price, is based on the net asset value per share which is calculated once daily as of approximately 4:00 p.m. New York time, which is the normal close of trading on the New York Stock Exchange, each day the Exchange is open. If, for example, the Exchange closes at 1:00 p.m., the fund's share price would still be determined as of 4:00 p.m. New York time. The New York Stock Exchange is currently closed on weekends and on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas Day. Each share class of the fund has a separately calculated net asset value (and share price). Fundamental Investors - Page 32 All portfolio securities of funds managed by Capital Research and Management Company (other than money market funds) are valued, and the net asset values per share for each share class are determined, as follows: 1. Equity securities, including depositary receipts, are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities are valued at prices obtained from an independent pricing service, when such prices are available; however, in circumstances where the investment adviser deems it appropriate to do so, such securities will be valued at the mean quoted bid and asked prices (or bid prices, if asked prices are not available) or at prices for securities of comparable maturity, quality and type. Securities with both fixed-income and equity characteristics (e.g., convertible bonds, preferred stocks, units comprised of more than one type of security, etc.), or equity securities traded principally among fixed-income dealers, are valued in the manner described above for either equity or fixed-income securities, depending on which method is deemed most appropriate by the investment adviser. Securities with original maturities of one year or less having 60 days or less to maturity are amortized to maturity based on their cost if acquired within 60 days of maturity, or if already held on the 60th day, based on the value determined on the 61st day. Forward currency contracts are valued at the mean of representative quoted bid and asked prices. Assets or liabilities initially expressed in terms of non-U.S. currencies are translated prior to the next determination of the net asset value of the fund's shares into U.S. dollars at the prevailing market rates. Securities and assets for which market quotations are not readily available or are considered unreliable are valued at fair value as determined in good faith under policies approved by the fund's Board. Subject to Board oversight, the fund's Board has delegated the obligation to make fair valuation determinations to a Valuation Committee established by the fund's investment adviser. The Board receives regular reports describing fair-valued securities and the valuation methods used. The Valuation Committee has adopted guidelines and procedures (consistent with SEC rules and guidance) to ensure that certain basic principles and factors are considered when making all fair value determinations. As a general principle, securities lacking readily available market quotations, or that have quotations that are considered unreliable, are valued in good faith by the Valuation Committee based upon what the fund might reasonably expect to receive upon their current sale. The Valuation Committee considers all indications of value available to it in determining the "fair value" to be assigned to a particular security, including, without limitation, the type and cost of the security, contractual or legal restrictions on resale of the security, relevant financial or business developments of the issuer, actively traded similar or related securities, conversion or exchange rights on the security, related corporate actions, significant events occurring after the close of trading in the security and changes in overall market conditions. Fundamental Investors - Page 33 2. Each class of shares represents interests in the same portfolio of investments and is otherwise identical in all respects to each other class, except for differences relating to distribution, service and other charges and expenses, certain voting rights, differences relating to eligible investors, the designation of each class of shares, conversion features and exchange privileges. Expenses attributable to the fund, but not to a particular class of shares, are borne by each class on the basis of the relative aggregate net assets of the classes. Expenses directly attributable to a class of shares are borne by that class of shares. Liabilities, including accruals of taxes and other expense items attributable to particular share classes, are deducted from total assets attributable to the respective share classes. 3. Net assets so obtained for each share class are then divided by the total number of shares outstanding of that share class, and the result, rounded to the nearer cent, is the net asset value per share for that share class. Any purchase order may be rejected by the Principal Underwriter or by the fund. The Principal Underwriter will not knowingly sell shares of the fund directly or indirectly to any person or entity, where, after the sale, such person or entity would own beneficially directly or indirectly more than 3.0% of the outstanding shares of the fund without the consent of a majority of the fund's Board. SHAREHOLDER ACCOUNT SERVICES ACCOUNT STATEMENTS - Your account is opened in accordance with your registration instructions. Transactions in the account, such as additional investments, will be reflected on regular confirmation statements from the Transfer Agent. Dividend and capital gain reinvestments, and purchases through certain retirement plans, will be confirmed at least quarterly. REDEMPTION OF SHARES - The fund's Articles of Incorporation permit the fund to direct the Transfer Agent to redeem the shares of any shareholder for their then current net asset value per share if at such time the shareholder of record owns shares having an aggregate net asset value of less than the minimum initial investment amount required of new shareholders as set forth in the fund's current registration statement under the 1940 Act, and subject to such further terms and conditions as the Board of Directors of the fund may from time to time adopt. While payment of redemptions normally will be in cash, the fund's Articles of Incorporation permit payment of the redemption price wholly or partly in securities or other property included in the assets belonging to the fund when in the opinion of the fund's Board of Directors, which shall be conclusive, conditions exist which make payment wholly in cash unwise or undesirable. SHARE CERTIFICATES - Shares are credited to your account and certificates are not issued unless you request them by writing to the Transfer Agent. Certificates are not available for the R share classes. EXECUTION OF PORTFOLIO TRANSACTIONS The investment adviser places orders with broker-dealers for the fund's portfolio transactions. The investment adviser strives to obtain best execution on the fund's portfolio transactions, taking into account a variety of factors to produce the most favorable total price reasonably attainable under the circumstances. These factors include the size and type of transaction, the cost and quality of executions, and the broker-dealer's ability to offer liquidity and anonymity. The fund does not consider the investment adviser as having an obligation to obtain the lowest available Fundamental Investors - Page 34 commission rate to the exclusion of price, service and qualitative considerations. Subject to the considerations outlined above, the investment adviser may place orders for the fund's portfolio transactions with broker-dealers who have sold shares of the funds managed by the investment adviser, or who have provided investment research, statistical or other related services to the investment adviser. In placing orders for the fund's portfolio transactions, the investment adviser does not commit to any specific amount of business with any particular broker-dealer. Further, when the investment adviser places orders for the fund's portfolio transactions, it does not give any consideration to whether a broker-dealer has sold shares of the funds managed by the investment adviser. The investment adviser may, however, give consideration to investment research, statistical or other related services provided to the adviser in placing orders for the fund's portfolio transactions. Portfolio transactions for the fund may be executed as part of concurrent authorizations to purchase or sell the same security for other funds served by the investment adviser, or for trusts or other accounts served by affiliated companies of the investment adviser. When such concurrent authorizations occur, the objective is to allocate the executions in an equitable manner. Brokerage commissions paid on portfolio transactions, including investment dealer concessions on underwritings, if applicable, for the fiscal years ended 2003, 2002 and 2001, amounted to $16,389,000, $22,067,000 and $22,124,000. The decrease in brokerage commissions in 2003 is principally due to a decrease in portfolio transactions. The fund is required to disclose information regarding investments in the securities of its "regular" broker-dealers (or parent companies of its regular broker-dealers) that derive more than 15% of their revenue from broker-dealer, underwriter or investment adviser activities. A regular broker-dealer is: (1) one of the 10 broker-dealers that received from the fund the largest amount of brokerage commissions by participating, directly or indirectly, in the fund's portfolio transactions during the fund's most recent fiscal year; (2) one of the 10 broker-dealers that engaged as principal in the largest dollar amount of portfolio transactions of the fund during the fund's most recent fiscal year; or (3) one of the 10 broker-dealers that sold the largest amount of securities of the fund during the fund's most recent fiscal year. At the end of the fund's most recent fiscal year, the fund held equity securities of JP Morgan Chase & Co. in the amount of $282,270,000 and Bank of America Corp. in the amount of $56,172,000. GENERAL INFORMATION CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds from the sale of shares of the fund and of securities in the fund's portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110, as Custodian. If the fund holds non-U.S. securities, the Custodian may hold these securities pursuant to sub-custodial arrangements in non-U.S. banks or non-U.S. branches of U.S. banks. TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of the investment adviser, maintains the records of shareholder accounts, processes purchases and redemptions of the fund's shares, acts as dividend and capital gain distribution disbursing agent, and performs other related shareholder service functions. The principal office of American Funds Service Company is located at 135 South State College Boulevard, Brea, CA 92821-5823. American Funds Service Company was paid a fee of $19,207,000 for Class A shares for the 2003 fiscal year. Fundamental Investors - Page 35 In the case of certain shareholder accounts, third parties who may be unaffiliated with the investment adviser provide transfer agency and shareholder services in place of American Funds Service Company. These services are rendered under agreements with American Funds Service Company or its affiliates and the third parties receive compensation according to such agreements. Compensation for transfer agency and shareholder services, whether paid to American Funds Service Company or such third parties, is ultimately paid from fund assets and is reflected in the expenses of the fund as disclosed in the prospectus. INDEPENDENT AUDITORS - Deloitte & Touche LLP, Two California Plaza, 350 South Grand Avenue, Suite 200, Los Angeles, CA 90071, serves as the fund's independent auditors, providing audit services, preparation of tax returns and review of certain documents to be filed with the Securities and Exchange Commission. The financial statements included in this Statement of Additional Information from the Annual Report have been so included in reliance on the report of Deloitte & Touche LLP, independent auditors, given on the authority of said firm as experts in accounting and auditing. The selection of the fund's independent auditors is reviewed and determined annually by the Board of Directors. INDEPENDENT LEGAL COUNSEL - Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, Los Angeles, CA 90071, currently serves as counsel for the fund, and for Directors who are not interested persons (as defined by the 1940 Act) of the fund in their capacities as such. Certain legal matters in connection with the capital shares offered by the prospectus have been passed upon for the fund by Paul, Hastings, Janofsky & Walker LLP. Counsel does not currently provide legal services to the fund's investment adviser or any of its affiliated companies. A determination with respect to the independence of the fund's "independent legal counsel" will be made at least annually by the independent Directors of the fund, as prescribed by the 1940 Act and the related rules. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS - The fund's fiscal year ends on December 31. Shareholders are provided updated prospectuses annually and at least semiannually with reports showing the investment portfolio, financial statements and other information. The fund's annual financial statements are audited by the fund's independent auditors, Deloitte & Touche LLP. In addition, shareholders may also receive proxy statements for the fund. In an effort to reduce the volume of mail shareholders receive from the fund when a household owns more than one account, the Transfer Agent has taken steps to eliminate duplicate mailings of prospectuses, shareholder reports and proxy statements. To receive additional copies of a prospectus, report or proxy statement, shareholders should contact the Transfer Agent. CODES OF ETHICS - The fund and Capital Research and Management Company and its affiliated companies, including the fund's principal underwriter, have adopted codes of ethics which allow for personal investments, including securities in which the fund may invest from time to time. These codes include: a ban on acquisitions of securities pursuant to an initial public offering; restrictions on acquisitions of private placement securities; pre-clearance and reporting requirements; review of duplicate confirmation statements; annual recertification of compliance with codes of ethics; blackout periods on personal investing for certain investment personnel; ban on short-term trading profits for investment personnel; limitations on service as a director of publicly traded companies; and disclosure of personal securities transactions. PROXY VOTING PROCEDURES AND GUIDELINES - The investment adviser has adopted Proxy Voting Guidelines (the "Guidelines") with respect to voting proxies of securities held by the American Fundamental Investors - Page 36 Funds, Endowments and American Funds Insurance Series. Certain funds, including the fund, have established separate proxy committees that vote proxies or delegate to a voting officer the authority to vote on behalf of those funds. Proxies for all other funds are voted by an investment committee of the investment adviser under authority delegated by the funds' Boards. Therefore, if more than one fund invests in the same company, they may vote differently on the same proposal. All U.S. proxies are voted. Non-U.S. proxies also are voted, provided there is sufficient time and information available. After a proxy is received, the investment adviser prepares a summary of the proposals in the proxy. A discussion of any potential conflicts of interest is also included in the summary. After reviewing the summary, one or more research analysts familiar with the company and industry make a voting recommendation on the proxy proposals. A second recommendation is made by a proxy coordinator (a senior investment professional) based on the individual's knowledge of the Guidelines and familiarity with proxy-related issues. The proxy summary and voting recommendations are then sent to the appropriate proxy voting committee for the final voting decision. The analyst and proxy coordinator making voting recommendations are responsible for noting any potential material conflicts of interest. One example might be where a director of one or more American Funds is also a director of a company whose proxy is being voted. In such instances, proxy committee members are alerted to the potential conflict. The proxy committee may then elect to vote the proxy or seek a third-party recommendation or vote of an ad hoc group of committee members. The Guidelines, which have been in effect in substantially their current form for many years, provide an important framework for analysis and decision-making by all funds; however, they are not exhaustive and do not address all potential issues. The Guidelines provide a certain amount of flexibility so that all relevant facts and circumstances can be considered in connection with every vote. As a result, each proxy received is voted on a case-by-case basis considering the specific circumstances of each proposal. The voting process reflects the funds' understanding of the company's business, its management and its relationship with shareholders over time. Beginning August 31, 2004 (and each August 31 thereafter) each fund will be required to file Form N-PX containing its complete voting record for the 12 months ended the preceding June 30. Once filed, the most recent Form N-PX will be available (i) without charge, upon request, by calling American Funds Service Company at 800/421-0180, and (ii) on the SEC's website at www.sec.gov. The following summary sets forth the general positions of the American Funds, Endowments, American Funds Insurance Series and the investment adviser on various proposals. A copy of the full Guidelines is available upon request, free of charge, by calling American Funds Service Company at 800/421-0180 or visiting the American Funds website at americanfunds.com. DIRECTOR MATTERS - The election of a company's slate of nominees for director is generally supported. Votes may be withheld for some or all of the nominees if this is determined to be in the best interest of shareholders. Separation of the Chairman and CEO positions may also be supported. Typically, proposals to declassify the board (elect all directors annually) are supported based on the belief that this increases the directors' sense of accountability to shareholders. Fundamental Investors - Page 37 SHAREHOLDER RIGHTS - Proposals to repeal an existing poison pill, to provide for confidential voting and to provide for cumulative voting are usually supported. Proposals to eliminate the right of shareholders to act by written consent or to take away a shareholder's right to call a special meeting are not typically supported. COMPENSATION AND BENEFIT PLANS - Option plans are complicated, and many factors are considered in evaluating a plan. Each plan is evaluated based on protecting shareholder interests and a knowledge of the company and its management. Considerations include the pricing (or repricing) of options awarded under the plan and the impact of dilution on existing shareholders from past and future equity awards. Compensation packages should be structured to attract, motivate and retain existing employees and qualified directors; however, they should not be excessive. ROUTINE MATTERS - The ratification of auditors, procedural matters relating to the annual meeting, and changes to company name are examples of items considered routine. Such items are generally voted in favor of management's recommendations unless circumstances indicate otherwise. OTHER INFORMATION - The financial statements including the investment portfolio and the report of Independent Auditors contained in the Annual Report are included in this Statement of Additional Information. The following information is not included in the Annual Report: DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND MAXIMUM OFFERING PRICE PER SHARE FOR CLASS A SHARES - DECEMBER 31, 2003
Net asset value and redemption price per share (Net assets divided by shares outstanding). . $28.85 Maximum offering price per share (100/94.25 of net asset value per share, which takes into account the fund's current maximum sales charge). . . . . . . . . . . . . . . . $30.61
Fundamental Investors - Page 38 APPENDIX The following descriptions of debt security ratings are based on information provided by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("Standard & Poor's"). DESCRIPTION OF BOND RATINGS MOODY'S LONG-TERM RATING DEFINITIONS Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk. Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit risk. A Obligations rated A are considered upper-medium grade and are subject to low credit risk. Baa Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk. B Obligations rated B are considered speculative and are subject to high credit risk. Caa Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk. Ca Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. C Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. NOTE: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. Fundamental Investors - Page 39 STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS AAA An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA An obligation rated AA differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB, B, CCC, CC, AND C Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC An obligation rated CC is currently highly vulnerable to nonpayment. Fundamental Investors - Page 40 C The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. D An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. PLUS (+) OR MINUS (-) The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. Fundamental Investors - Page 41 INVESTMENT PORTFOLIO, December 31, 2003 [begin pie chart] Percent of INDUSTRY DIVERSIFICATION Net Assets Equity securities 94.92 % Oil & Gas 8.70 Metals & Mining 5.90 Aerospace & Defense 5.08 Pharmaceuticals 5.05 Commercial Banks 4.98 Other industries 65.21 Bonds & notes 1.16 Cash & equivalents 3.92 [end pie chart] Percent of net LARGEST EQUITY HOLDINGS assets Dow Chemical 2.67 % Suncor Energy 2.12 Altria Group 2.07 Time Warner 2.02 Norsk Hydro 1.89 FleetBoston Financial 1.86 Deere 1.84 Microsoft 1.76 Alcoa 1.64 SBC Communications 1.61
Shares or Market value EQUITY SECURITIES (COMMON AND PREFERRED STOCKS AND CONVERTIBLE DEBENTURES) - 94.92% principal amount (000) OIL & GAS - 8.70% Suncor Energy Inc. (Canada) 17,903,010 $ 449,165 Norsk Hydro AS (ADR) (Norway) 3,559,000 219,946 Norsk Hydro AS 2,934,600 180,130 LUKoil Holding (ADR) (Russia) 2,250,000 209,475 Murphy Oil Corp. 2,370,000 154,785 Shell Canada Ltd. (Canada) 3,273,200 154,766 ConocoPhillips 1,700,000 111,469 Unocal Corp. 1,900,000 69,977 Unocal Capital Trust 6.25% convertible preferred 2026 $ 450,000 22,950 ChevronTexaco Corp. 1,000,000 86,390 Burlington Resources Inc. 1,000,000 55,380 Imperial Oil Ltd. (Canada) 1,184,778 52,628 Royal Dutch Petroleum Co., New York registered (Netherlands) 875,000 45,841 Exxon Mobil Corp. 750,000 30,750 METALS & MINING - 5.90% Alcoa Inc. 9,173,800 348,604 BHP Billiton Ltd. (Australia) 23,945,030 219,501 Freeport-McMoRan Copper & Gold Inc., Class B 4,973,100 209,517 Rio Tinto PLC (United Kingdom) 6,500,000 178,866 CONSOL Energy Inc. (1) (2) 3,700,000 86,247 Phelps Dodge Corp. (3) 965,620 73,474 Inco Ltd. (Canada) (3) 1,632,300 64,998 Massey Energy Co. 2,011,700 41,843 Arch Coal, Inc. 5.00% convertible preferred 2049 $ 200,000 17,068 BlueScope Steel Ltd. (formerly BHP Steel Ltd.) (Australia) 2,113,020 8,898 AEROSPACE & DEFENSE - 5.08% Boeing Co. 7,350,000 309,729 Raytheon Co. 7,592,732 228,086 Raytheon Co. - RC Trust I 8.25% convertible preferred 2006 1,180,000 units 64,050 Northrop Grumman Corp. 1,150,000 109,940 Northrop Grumman Corp. 7.25% convertible preferred 2004 572,690 units 59,388 General Dynamics Corp. 1,772,900 160,252 Honeywell International Inc. 1,500,000 50,145 United Technologies Corp. 525,000 49,754 Bombardier Inc., Class B (Canada) 7,500,000 31,670 Lockheed Martin Corp. 248,200 12,757 PHARMACEUTICALS - 5.05% AstraZeneca PLC (Sweden) 2,660,000 129,399 AstraZeneca PLC (United Kingdom) 2,000,000 95,590 AstraZeneca PLC (ADR) 1,676,266 81,098 Sanofi-Synthelabo (France) 2,850,000 213,566 Eli Lilly and Co. 2,850,000 200,440 Bristol-Myers Squibb Co. 4,350,000 124,410 Merck & Co., Inc. 1,700,000 78,540 Schering-Plough Corp. 3,900,000 67,821 Forest Laboratories, Inc. (3) 700,000 43,260 Pfizer Inc 1,000,000 35,330 COMMERCIAL BANKS - 4.98% FleetBoston Financial Corp. 9,030,000 394,160 Allied Irish Banks, PLC (Ireland) 12,170,334 194,466 Cullen/Frost Bankers, Inc. 2,550,000 103,453 KeyCorp 3,100,000 90,892 Bank of Ireland (Ireland) 6,500,000 88,278 Bank of America Corp. 698,400 56,172 National Bank of Canada (Canada) 1,405,000 46,790 Comerica Inc. 800,000 44,848 St. George Bank Ltd. (Australia) 2,450,279 35,931 DIVERSIFIED TELECOMMUNICATION SERVICES - 4.33% SBC Communications Inc. 13,050,000 340,213 China Telecom Corp. Ltd., Class H (China) 400,000,000 164,895 Verizon Communications Inc. 4,615,000 161,894 Telecom Italia SpA, nonvoting (Italy) (3) 34,200,000 69,328 Deutsche Telekom AG (Germany) (3) 2,300,000 41,890 Deutsche Telekom International Finance BV 6.50% convertible bonds 2006 Euro 12,000,000 17,612 Swisscom AG (Switzerland) $ 167,510 55,041 Telefonica, SA (Spain) (3) 2,950,000 43,101 AT&T Corp. 800,000 16,240 Sprint Corp. - FON Group 400,000 6,568 MEDIA - 4.29% Time Warner Inc. (formerly AOL Time Warner Inc.) (3) 23,815,000 428,432 News Corp. Ltd., preferred (ADR) (Australia) 8,610,000 260,452 Comcast Corp., Class A (3) 2,825,500 92,874 Comcast Corp., Class A, special nonvoting stock (3) 500,000 15,640 Dow Jones & Co., Inc. 1,800,000 89,730 Liberty Media Corp., Class A (3) 915,000 10,879 Interpublic Group of Companies, Inc. 1.87% convertible subordinated notes 2006 (1) $ 8,168,000 7,576 UnitedGlobalCom, Inc., Class A (1) (2) (3) 225,035 1,717 Antena 3 Television, SA (Spain) (3) 9,979 438 CHEMICALS - 4.17% Dow Chemical Co. 13,625,000 566,391 E.I. du Pont de Nemours and Co. 3,000,000 137,670 Shin-Etsu Chemical Co., Ltd. (Japan) 1,940,000 79,110 Air Products and Chemicals, Inc. 1,300,000 68,679 Lyondell Chemical Co. 1,450,000 24,577 Potash Corp. of Saskatchewan Inc. (Canada) 69,200 5,984 MACHINERY - 4.16% Deere & Co. 5,971,100 388,420 Caterpillar Inc. 2,600,000 215,852 Parker Hannifin Corp. 2,600,000 154,700 Eaton Corp. 850,000 91,783 Illinois Tool Works Inc. 357,200 29,973 INSURANCE - 3.81% American International Group, Inc. 3,800,000 251,864 Allstate Corp. 3,500,000 150,570 XL Capital Ltd., Class A 1,825,000 141,529 Irish Life & Permanent PLC (Ireland) 7,000,000 112,466 Chubb Corp. 7.00% convertible preferred 2005 1,200,000 units 34,272 Chubb Corp. 300,000 20,430 Aon Corp. 1,767,400 42,312 St. Paul Companies, Inc. 700,000 27,755 21st Century Insurance Group 1,808,900 24,872 PAPER & FOREST PRODUCTS - 2.98% International Paper Co. 5,275,000 227,405 Weyerhaeuser Co. 2,883,000 184,512 Norske Skogindustrier ASA, Class A (Norway) 6,566,900 124,706 Oji Paper Co., Ltd. (Japan) 6,500,000 41,877 Bowater Inc. 700,000 32,417 Georgia-Pacific Corp., Georgia-Pacific Group 698,640 21,427 INDUSTRIAL CONGLOMERATES - 2.98% General Electric Co. 9,150,000 283,467 3M Co. 2,500,000 212,575 Tyco International Ltd. 5,125,000 135,813 SPECIALTY RETAIL - 2.57% Lowe's Companies, Inc. 5,524,900 306,024 Limited Brands, Inc. 13,200,000 237,996 ELECTRIC UTILITIES - 2.31% Dominion Resources, Inc. 4,590,000 292,980 DTE Energy Co. 1,606,900 63,312 American Electric Power Co., Inc. 1,902,100 58,033 TXU Corp. 1,167,200 27,686 FirstEnergy Corp. 569,200 20,036 E.ON AG (Germany) 300,000 19,483 Entergy Corp. 150,000 8,570 MULTI-UTILITIES & UNREGULATED POWER - 2.15% Duke Energy Corp. 10,275,000 210,124 Questar Corp. 3,000,000 105,450 Public Service Enterprise Group Inc. 1,480,000 64,824 Constellation Energy Group, Inc. 1,500,000 58,740 El Paso Corp. 2,100,000 17,199 COMPUTERS & PERIPHERALS - 2.14% International Business Machines Corp. 2,225,000 206,213 Sun Microsystems, Inc. (3) 21,000,000 94,290 NEC Corp. (Japan) 11,516,000 84,593 Hewlett-Packard Co. 3,000,000 68,910 TOBACCO - 2.07% Altria Group, Inc. 8,050,000 438,081 FOOD PRODUCTS - 1.94% Unilever NV, New York registered (Netherlands) 4,100,000 266,090 Sara Lee Corp. 3,375,000 73,271 General Mills, Inc. 1,404,200 63,610 Kraft Foods Inc., Class A 200,000 6,444 H.J. Heinz Co. 70,000 2,550 SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.89% Texas Instruments Inc. 11,353,424 333,564 Maxim Integrated Products, Inc. 701,600 34,940 Linear Technology Corp. 500,000 21,035 ASML Holding NV 5.50% convertible notes 2010 Euro 6,000,000 10,760 ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.88% Sanmina Corp. 0% convertible subordinated debentures 2020 $ 166,000,000 85,075 SCI Systems, Inc. 3.00% convertible subordinated debentures 2007 $ 54,500,000 51,775 Agilent Technologies, Inc. (3) 3,700,000 108,188 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (4) $ 15,074,000 16,544 Agilent Technologies, Inc. 3.00% convertible debentures 2021 (1) (4) $ 10,370,000 11,381 Hitachi, Ltd. (Japan) 14,824,000 89,157 Solectron Corp. 7.25% ACES convertible preferred 2004 1,200,000 units 20,016 Murata Manufacturing Co., Ltd. (Japan) 300,000 16,172 SOFTWARE - 1.76% Microsoft Corp. 13,565,000 373,580 IT SERVICES - 1.59% Automatic Data Processing, Inc. 5,375,000 212,904 Sabre Holdings Corp., Class A 2,645,304 57,112 Electronic Data Systems Corp. 1,400,000 34,356 Electronic Data Systems Corp. 7.625% FELINE PRIDES 2004 279,600 units 6,411 Ceridian Corp. (3) 1,200,000 25,128 COMMUNICATIONS EQUIPMENT - 1.57% Cisco Systems, Inc. (3) 7,000,000 170,030 Motorola, Inc. 8,000,000 112,560 Motorola, Inc. 7.00% convertible preferred 2004 800,000 units 34,744 Corning Inc. (3) 1,520,000 15,854 AUTOMOBILES - 1.41% Toyota Motor Corp. (Japan) 6,000,000 202,216 General Motors Corp. 1,800,000 96,120 ENERGY EQUIPMENT & SERVICES - 1.41% Halliburton Co. 7,500,000 195,000 Baker Hughes Inc. 3,200,000 102,912 CAPITAL MARKETS - 1.33% J.P. Morgan Chase & Co. 7,685,000 282,270 ELECTRICAL EQUIPMENT - 1.31% Emerson Electric Co. 4,300,000 278,425 MULTILINE RETAIL - 1.30% Target Corp. 4,890,000 187,776 May Department Stores Co. 3,000,000 87,210 BEVERAGES - 1.18% Anheuser-Busch Companies, Inc. 1,700,000 89,556 PepsiCo, Inc. 1,800,000 83,916 Coca-Cola Co. 1,500,000 76,125 THRIFTS & MORTGAGE FINANCE - 0.97% Fannie Mae 2,117,800 158,962 Independence Community Bank Corp. 1,295,900 46,614 CONTAINERS & PACKAGING - 0.81% Temple-Inland Inc. (5) 2,750,000 172,343 ROAD & RAIL - 0.81% Union Pacific Corp. 1,500,000 104,220 Burlington Northern Santa Fe Corp. 2,100,000 67,935 FOOD & STAPLES RETAILING - 0.61% Walgreen Co. 3,345,000 121,691 SYSCO Corp. 200,000 7,446 AUTO COMPONENTS - 0.57% Magna International Inc., Class A (Canada) 1,000,000 80,050 Dana Corp. 2,215,300 40,651 GAS UTILITIES - 0.57% NiSource Inc. 2,800,000 61,432 KeySpan Corp. 1,584,000 58,291 AIR FREIGHT & LOGISTICS - 0.53% United Parcel Service, Inc., Class B 1,500,000 111,825 REAL ESTATE - 0.46% Equity Residential 2,850,000 84,104 MI Developments Inc., Class A (Canada) (3) 500,000 13,960 HEALTH CARE PROVIDERS & SERVICES - 0.40% HCA Inc. 1,000,000 42,960 CIGNA Corp. 725,000 41,688 WIRELESS TELECOMMUNICATION SERVICES - 0.35% Vodafone Group PLC (United Kingdom) 30,175,000 74,533 AIRLINES - 0.32% Continental Airlines, Inc., Class B (3) 2,675,000 43,522 Southwest Airlines Co. 1,500,000 24,210 OTHER - 0.41% Amgen Inc. (3) 500,000 30,900 Allied Waste Industries, Inc., Series C, 6.25% convertible preferred 2006 $ 360,000 27,540 InterActiveCorp (3) 456,000 15,472 Avon Products, Inc. 170,000 11,473 Colgate-Palmolive Co. 10,000 501 MISCELLANEOUS - 1.87% Other equity securities in initial period of acquisition 396,852 TOTAL EQUITY SECURITIES (cost: $16,872,105,000) 20,107,307 Principal amount BONDS & NOTES - 1.16% (000) AIRLINES - 0.75% Northwest Airlines, Inc.: 8.875% 2006 $ 58,185 53,094 7.625% 2005 37,860 37,103 9.875% 2007 15,335 14,032 7.875% 2008 16,566 13,874 8.52% 2004 5,000 5,050 Continental Airlines, Inc. 8.00% 2005 28,600 27,956 Delta Air Lines, Inc., Series 1993-A2, 10.50% 2016 (6) 11,500 8,740 MEDIA - 0.26% Charter Communications Holdings, LLC 8.25% 2007 50,000 47,250 Time Warner Inc. 10.15% 2012 6,000 8,021 DIVERSIFIED TELECOMMUNICATION SERVICES - 0.15% Comcast UK Cable Partners Ltd. 11.20% 2007 19,570 19,864 AT&T Corp. 6.50% 2006 (1) (4) Euro 8,950 12,048 TOTAL BONDS & NOTES (cost: $226,029,000) 247,032 SHORT-TERM SECURITIES - 3.82% CORPORATE SHORT-TERM NOTES - 3.15% CAFCO, LLC 1.07%-1.09% due 1/22-1/28/2004 (1) $ 79,700 79,641 Coca-Cola Co. 1.01%-1.03% due 1/26-3/5/2004 72,000 71,918 Park Avenue Receivables Corp. 1.08%-1.09% due 1/9-1/29/2004 (1) 60,999 60,971 Procter & Gamble Co. 1.02%-1.05% due 1/9-2/9/2004 (1) 55,000 54,959 Pfizer Inc 1.02%-1.03% due 1/16-1/28/2004 (1) 54,200 54,170 Receivables Capital Corp. 1.07%-1.08% due 1/20-2/3/2004 (1) 50,000 49,958 Edison Asset Securitization LLC 1.07%-1.08% due 1/8-2/17/2004 (1) 49,100 49,044 Preferred Receivables Funding Corp. 1.08% due 1/29-2/5/2004 (1) 47,611 47,568 E.I. DuPont de Nemours & Co. 1.04%-1.05% due 1/23-1/27/2004 45,000 44,966 BellSouth Corp. 1.01%-1.03% due 1/7-1/21/2004 (1) 35,200 35,187 Netjets Inc. 1.06%-1.07% due 1/12-2/10/2004 (1) 33,600 33,575 Verizon Network Funding Corp. 1.02%-1.03% due 1/22-2/11/2004 25,000 24,979 Merck & Co. Inc. 1.01% due 1/20/2004 21,018 21,006 Caterpillar Financial Serivces Corp. 1.01% due 3/4/2004 20,000 19,964 Harley-Davidson Funding Corp. 1.01%-1.05% due 1/2-1/15/2004 (1) 14,500 14,496 Johnson Controls Inc. 0.94% due 1/2/2004 (1) 5,000 5,000 U.S. TREASURIES - 0.34% U.S. Treasury Bills 0.87%-0.93% due 2/12-2/19/2004 72,100 72,026 CERTIFICATES OF DEPOSIT - 0.18% Wells Fargo & Co. 1.04%-1.07% due 1/9-1/13/2004 38,000 38,000 FEDERAL AGENCY DISCOUNT NOTES - 0.15% International Bank for Reconstruction and Development 1.01% due 2/6/2004 26,100 26,073 Student Loan Marketing Assn. 1.00% due 1/13/2004 5,300 5,298 TOTAL SHORT-TERM SECURITIES (cost: $808,795,000) 808,799 TOTAL INVESTMENT SECURITIES (cost: $17,906,929,000) 21,163,138 OTHER ASSETS LESS LIABILITIES 20,899 NET ASSETS $21,184,037
(1) Purchased in a private placement transaction; resale may be limited to qualified institutional buyers; resale to the public may require registration. (2) Valued under fair value procedures adopted by authority of the Board of Directors. (3) Security did not produce income during the last 12 months. (4) Coupon rate may change periodically. (5) The fund owns 5.07% of the outstanding voting securities of Temple-Inland Inc., and thus is considered an affiliate of this company under the Investment Company Act of 1940. (6) Pass-through security backed by a pool of mortgages or other loans on which principal payments are periodically made. Therefore, the effective maturity is shorter than the stated maturity. ADR = American Depositary Receipts See Notes to Financial Statements FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (dollars and shares in thousands, at December 31, 2003 except per-share amounts) ASSETS: Investment securities at market: Unaffiliated issuers (cost: $17,786,564) $20,990,795 Affiliated issuers (cost: $120,365) 172,343 $21,163,138 Cash 184 Receivables for: Sales of investments 10,918 Sales of fund's shares 28,061 Dividends and interest 39,234 78,213 21,241,535 LIABILITIES: Payables for: Purchases of investments 12,832 Repurchases of fund's shares 32,289 Investment advisory services 4,711 Services provided by affiliates 6,294 Deferred Directors' compensation 1,145 Other fees and expenses 227 57,498 NET ASSETS AT DECEMBER 31, 2003 $21,184,037 NET ASSETS CONSIST OF: Capital paid in on shares of capital stock $19,291,562 Undistributed net investment income 65,000 Accumulated net realized loss (1,429,024) Net unrealized appreciation 3,256,499 NET ASSETS AT DECEMBER 31, 2003 $21,184,037
TOTAL AUTHORIZED CAPITAL STOCK - 1,000,000 SHARES, $1.00 PAR VALUE Net asset Net assets Shares outstanding value per share (1) Class A $19,211,574 665,890 $28.85 Class B 836,257 29,039 28.80 Class C 413,527 14,371 28.78 Class F 310,658 10,771 28.84 Class 529-A 88,073 3,054 28.84 Class 529-B 18,648 647 28.83 Class 529-C 26,786 929 28.83 Class 529-E 4,447 154 28.83 Class 529-F 1,116 39 28.82 Class R-1 2,122 74 28.79 Class R-2 45,068 1,566 28.77 Class R-3 65,698 2,280 28.82 Class R-4 47,539 1,649 28.83 Class R-5 112,524 3,899 28.86 (1) Maximum offering price and redemption price per share were equal to the net asset value per share for all share classes, except for classes A and 529-A, for which the maximum offering prices per share were $30.61 and $30.60, respectively.
See Notes to Financial Statements STATEMENT OF OPERATIONS for the year ended December 31, 2003 (dollars in thousands) INVESTMENT INCOME: Income: Dividends (net of non-U.S. withholding tax of $8,769; also includes $3,485 from affiliates) $409,558 Interest 73,821 $483,379 Fees and expenses: Investment advisory services 48,382 Distribution services 50,115 Transfer agent services 20,126 Administrative services 1,703 Reports to shareholders 678 Registration statement and prospectus 341 Postage, stationery and supplies 2,172 Directors' compensation 354 Auditing and legal 84 Custodian 1,002 State and local taxes 1 Other 187 Total expenses before reimbursement 125,145 Reimbursement of expenses 126 125,019 Net investment income 358,360 NET REALIZED LOSS AND UNREALIZED APPRECIATION ON INVESTMENTS AND NON-U.S. CURRENCY: Net realized loss on: Investments (602,732) Non-U.S. currency transactions (764) (603,496) Net unrealized appreciation on: Investments 5,356,632 Non-U.S. currency translations 51 5,356,683 Net realized loss and unrealized appreciation on investments and non-U.S. currency 4,753,187 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,111,547
See Notes to Financial Statements STATEMENT OF CHANGES IN NET ASSETS (dollars in thousands) Year ended December 31 2003 2002 OPERATIONS: Net investment income $358,360 $306,427 Net realized loss on investments and non-U.S. currency transactions (603,496) (425,234) Net unrealized appreciation (depreciation) on investments and non-U.S. currency translations 5,356,683 (3,522,999) Net increase (decrease) in net assets resulting from operations 5,111,547 (3,641,806) DIVIDENDS PAID TO SHAREHOLDERS FROM NET INVESTMENT INCOME (283,809) (362,738) CAPITAL SHARE TRANSACTIONS (69,713) 90,287 TOTAL INCREASE (DECREASE) IN NET ASSETS 4,758,025 (3,914,257) NET ASSETS: Beginning of year 16,426,012 20,340,269 End of year (including undistributed (distributions in excess of) net investment income: $65,000 and $(19,176), respectively) $21,184,037 $16,426,012
See Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Fundamental Investors, Inc. (the "fund") is registered under the Investment Company Act of 1940 as an open-end, diversified management investment company. The fund seeks long-term growth of capital and income primarily through investments in common stocks. The fund offers 14 share classes consisting of four retail share classes, five CollegeAmerica savings plan share classes and five retirement plan share classes. The CollegeAmerica savings plan share classes (529-A, 529-B, 529-C, 529-E and 529-F) are sponsored by the Commonwealth of Virginia and can be utilized to save for college education. The five retirement plan share classes (R-1, R-2, R-3, R-4 and R-5) are sold without any sales charges and do not carry any conversion rights. The fund's share classes are described below: - --------------------------------------------------------------------------------------------------------- SHARE CLASS INITIAL SALES CHARGE CONTINGENT DEFERRED SALES CONVERSION FEATURE CHARGE UPON REDEMPTION - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes A and 529-A Up to 5.75% None (except 1% for None certain redemptions within one year of purchase without an initial sales charge) - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes B and 529-B None Declines from 5% to zero for Classes B and 529-B redemptions within six years convert to classes A and of purchase 529-A, respectively, after eight years - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class C None 1% for redemptions within Class C converts to Class F one year of purchase after 10 years - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class 529-C None 1% for redemptions within None one year of purchase - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Class 529-E None None None - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes F and 529-F None None None - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Classes R-1, R-2, R-3, None None None R-4 and R-5 - ---------------------------------------------------------------------------------------------------------
Holders of all share classes have equal pro rata rights to assets, dividends and liquidation. Each share class has identical voting rights, except for the exclusive right to vote on matters affecting only its class. Share classes have different fees and expenses ("class-specific fees and expenses"), primarily due to different arrangements for distribution, administrative and shareholder services. Differences in class-specific fees and expenses will result in differences in net investment income and, therefore, the payment of different per-share dividends by each class. SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared to comply with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed by the fund: SECURITY VALUATION - Equity securities are valued at the official closing price of, or the last reported sale price on, the exchange or market on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Prices for each security are taken from the principal exchange or market in which the security trades. Fixed-income securities are valued at prices obtained from an independent pricing service, when such prices are available. However, where the investment adviser deems it appropriate, such securities will be valued at the mean quoted bid and asked prices or at prices for securities of comparable maturity, quality and type. Short-term securities maturing within 60 days are valued at amortized cost, which approximates market value. The ability of the issuers of the debt securities held by the fund to meet their obligations may be affected by economic developments in a specific industry, state or region. Securities and other assets for which representative market quotations are not readily available are fair valued as determined in good faith by authority of the fund's Board of Directors. Various factors may be reviewed in order to make a good faith determination of a security's fair value. These factors include, but are not limited to, the type and cost of the security; contractual or legal restrictions on resale of the security; relevant financial or business developments of the issuer; actively traded similar or related securities; conversion or exchange rights on the security; related corporate actions; significant events occurring after the close of trading in the security; and changes in overall market conditions. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are recorded by the fund as of the date the trades are executed with brokers. Realized gains and losses from security transactions are determined based on the specific identified cost of the securities. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Market discounts, premiums and original issue discounts on fixed-income securities are amortized daily over the expected life of the security. CLASS ALLOCATIONS - Income, fees and expenses (other than class-specific fees and expenses) and realized and unrealized gains and losses are allocated daily among the various share classes based on their relative net assets. Class-specific fees and expenses, such as distribution, administrative and shareholder services, are charged directly to the respective share class. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions paid to shareholders are recorded on the ex-dividend date. NON-U.S. CURRENCY TRANSLATION - Assets and liabilities, including investment securities, denominated in non-U.S. currencies are translated into U.S. dollars at the exchange rates in effect at the end of the reporting period. Purchases and sales of investment securities and income and expenses are translated into U.S. dollars at the exchange rates on the dates of such transactions. In the accompanying financial statements, the effects of changes in non-U.S. exchange rates on investment securities are included with the net realized gain or loss and net unrealized appreciation or depreciation on investments. The realized gain or loss and unrealized appreciation or depreciation resulting from all other transactions denominated in non-U.S. currencies are disclosed separately. 2. NON-U.S. INVESTMENTS INVESTMENT RISK - The risks of investing in securities of non-U.S. issuers may include, but are not limited to, investment and repatriation restrictions; revaluation of currencies; adverse political, social and economic developments; government involvement in the private sector; limited and less reliable investor information; lack of liquidity; certain local tax law considerations; and limited regulation of the securities markets. TAXATION - Dividend and interest income is recorded net of non-U.S. taxes paid. 3. FEDERAL INCOME TAXATION AND DISTRIBUTIONS The fund complies with the requirements under Subchapter M of the Internal Revenue Code applicable to mutual funds and intends to distribute substantially all of its net taxable income and net capital gains each year. The fund is not subject to income taxes to the extent such distributions are made. DISTRIBUTIONS - Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as non-U.S. currency gains and losses; short-term capital gains and losses; capital losses related to sales of securities within 30 days of purchase; scheduled interest payments not received; deferred expenses; cost of investments sold; and net capital losses. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund. As of December 31, 2003, the cost of investment securities for federal income tax purposes was $17,921,825,000. During the year ended December 31, 2003, the fund reclassified $9,625,000 from accumulated net realized loss to undistributed net investment income to align financial reporting with tax reporting. As of December 31, 2003, the components of distributable earnings on a tax basis were as follows: (dollars in thousands) Undistributed net investment income and currency gains $ 66,238 Loss deferrals related to non-U.S. currency that were realized during the period November 1, 2003 through December 31, 2003 (93) Short-term and long-term capital loss deferrals (1,414,128) Gross unrealized appreciation on investment securities 4,287,323 Gross unrealized depreciation on investment securities (1,046,010)
Short-term and long-term capital loss deferrals above include capital loss carryforwards of $95,779,000, $577,387,000 and $740,962,000 expiring in 2009, 2010 and 2011, respectively. The capital loss carryforwards will be used to offset any capital gains realized by the fund in future years through the expiration dates. The fund will not make distributions from capital gains while capital loss carryforwards remain. Distributions paid to shareholders from net investment income and currency gains were as follows (dollars in thousands): YEAR ENDED DECEMBER 31 Share class 2003 2002(1) Class A $ 267,613 $ 345,886 Class B 6,070 8,215 Class C 2,626 3,168 Class F 3,841 3,838 Class 529-A 962 482 Class 529-B 89 64 Class 529-C 127 90 Class 529-E 35 15 Class 529-F 8 2 Class R-1 7 1 Class R-2 213 49 Class R-3 477 78 Class R-4 415 43 Class R-5 1,326 807 Total $ 283,809 $ 362,738
(1) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 4. FEES AND TRANSACTIONS WITH RELATED PARTIES Capital Research and Management Company ("CRMC"), the fund's investment adviser, is the parent company of American Funds Service Company ("AFS"), the fund's transfer agent, and American Funds Distributors, Inc. ("AFD"), the principal underwriter of the fund's shares. INVESTMENT ADVISORY SERVICES - The Investment Advisory and Service Agreement with CRMC provides for monthly fees accrued daily. These fees are based on a declining series of annual rates beginning with 0.390% on the first $1 billion of daily net assets and decreasing to 0.246% on such assets in excess of $27 billion. For the year ended December 31, 2003, the investment advisory services fee was $48,382,000, which was equivalent to an annualized rate of 0.275% of average daily net assets. CLASS-SPECIFIC FEES AND EXPENSES - Expenses that are specific to individual share classes are accrued directly to the respective share class. The principal class-specific fees and expenses are described below: DISTRIBUTION SERVICES - The fund has adopted plans of distribution for all share classes, except Class R-5. Under the plans, the Board of Directors approves certain categories of expenses that are used to finance activities primarily intended to sell fund shares. The plans provide for annual expenses, based on a percentage of average daily net assets, ranging from 0.25% to 1.00% as noted below. In some cases, the Board of Directors has approved expense amounts lower than plan limits. ------------------------------------------------ ----------------------------- ----------------------------- SHARE CLASS CURRENTLY APPROVED LIMITS PLAN LIMITS ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class A 0.25% 0.25% ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class 529-A 0.25 0.50 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes B and 529-B 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes C, 529-C and R-1 1.00 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Class R-2 0.75 1.00 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes 529-E and R-3 0.50 0.75 ------------------------------------------------ ----------------------------- ----------------------------- ------------------------------------------------ ----------------------------- ----------------------------- Classes F, 529-F and R-4 0.25 0.50 ------------------------------------------------ ----------------------------- -----------------------------
All share classes may use up to 0.25% of average daily net assets to pay service fees, or to compensate AFD for paying service fees, to firms that have entered into agreements with AFD for providing certain shareholder services. Expenses in excess of these amounts, up to approved limits, may be used to compensate dealers and wholesalers for shares sold. For classes A and 529-A, the Board of Directors has also approved the reimbursement of dealer and wholesaler commissions paid by AFD for certain shares sold without a sales charge. Each class reimburses AFD for amounts billed within the prior 15 months but only to the extent that the overall annual expense limit of 0.25% is not exceeded. As of December 31, 2003, there were no unreimbursed expenses subject to reimbursement for classes A or 529-A. TRANSFER AGENT SERVICES - The fund has a transfer agent agreement with AFS for classes A and B. Under this agreement, these share classes compensate AFS for transfer agent services including shareholder recordkeeping, communications and transaction processing. AFS is also compensated for certain transfer agent services provided to all other share classes from the administrative services fees paid to CRMC described below. ADMINISTRATIVE SERVICES - The fund has an administrative services agreement with CRMC to provide transfer agent and other related shareholder services for all classes of shares other than classes A and B. Each relevant class pays CRMC annual fees of 0.15% (0.10% for Class R-5) based on its respective average daily net assets. Each relevant class also pays AFS additional amounts for certain transfer agent services. CRMC and AFS may use these fees to compensate third parties for performing these services. During the start-up period for classes R-1, R-2, and R-3, CRMC has voluntarily agreed to pay a portion of these fees. Each 529 share class is subject to an additional annual administrative services fee of 0.10% of its respective average daily net assets; this fee is payable to the Commonwealth of Virginia for the maintenance of the CollegeAmerica plan. Although these amounts are included with administrative services fees in the accompanying financial statements, the Commonwealth of Virginia is not considered a related party. Administrative services fees are presented gross of any payments made by CRMC. Expenses under the agreements described above for the year ended December 31, 2003, were as follows (dollars in thousands): -------------------------------------------------------------------------------------------------------------- SHARE CLASS DISTRIBUTION TRANSFER AGENT ADMINISTRATIVE SERVICES SERVICES SERVICES -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- CRMC TRANSFER AGENT COMMONWEALTH OF ADMINISTRATIVE SERVICES VIRGINIA SERVICES SERVICES ADMINISTRATIVE -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class A $38,778 $19,207 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class B 6,809 919 Not applicable Not applicable Not applicable -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class C 3,117 Included $467 135 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class F 594 Included 357 40 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-A 62 Included 87 11 $ 58 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-B 123 Included 18 8 12 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-C 173 Included 26 8 17 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-E 14 Included 4 1 1 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class 529-F 1 Included 1 -* 3 in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-1 9 Included 1 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-2 182 Included 40 177 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-3 190 Included 59 57 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-4 63 Included 38 3 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Class R-5 Not applicable Included 70 2 Not applicable in administrative services -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Total $50,115 $20,126 $1,168 $444 $91 -------------------------------------------------------------------------------------------------------------- * Amount less than one thousand.
DEFERRED DIRECTORS' COMPENSATION - Since the adoption of the deferred compensation plan in 1993, Directors who are unaffiliated with CRMC may elect to defer the cash payment of part or all of their compensation. These deferred amounts, which remain as liabilities of the fund, are treated as if invested in shares of the fund or other American Funds. These amounts represent general, unsecured liabilities of the fund and vary according to the total returns of the selected funds. Directors' compensation in the accompanying financial statements includes $188,000 in current fees (either paid in cash or deferred) and a net increase of $166,000 in the value of the deferred amounts. AFFILIATED OFFICERS AND DIRECTORS - Officers and certain Directors of the fund are or may be considered to be affiliated with CRMC, AFS and AFD. No affiliated officers or Directors received any compensation directly from the fund. 5. CAPITAL SHARE TRANSACTIONS Capital share transactions in the fund were as follows (dollars and shares in thousands): Reinvestments of dividends Share class Sales(1) and distributions Amount Shares Amount Shares Year ended December 31, 2003 Class A $ 1,760,807 73,050 $ 252,281 10,556 Class B 106,466 4,450 5,861 248 Class C 103,912 4,277 2,524 106 Class F 105,565 4,359 3,347 139 Class 529-A 32,444 1,333 962 40 Class 529-B 7,209 297 89 4 Class 529-C 11,156 458 127 5 Class 529-E 2,001 83 35 1 Class 529-F 730 30 8 -* Class R-1 2,361 97 7 -* Class R-2 37,622 1,581 213 9 Class R-3 57,216 2,436 461 19 Class R-4 35,621 1,487 415 17 Class R-5 42,345 1,675 1,097 45 Total net increase (decrease) $ 2,305,455 95,613 $ 267,427 11,189 Year ended December 31, 2002(2) Class A $ 2,510,082 99,589 $ 325,159 13,445 Class B 196,132 7,724 7,923 335 Class C 161,418 6,407 3,050 130 Class F 135,377 5,446 3,355 141 Class 529-A 44,610 1,774 482 21 Class 529-B 9,031 362 64 3 Class 529-C 12,734 508 90 4 Class 529-E 1,753 72 15 1 Class 529-F 227 10 2 -* Class R-1 179 8 1 -* Class R-2 8,884 402 49 2 Class R-3 14,900 674 78 3 Class R-4 7,251 326 43 2 Class R-5 69,699 2,695 607 27 Total net increase (decrease) $ 3,172,277 125,997 $ 340,918 14,114 Share class Repurchases(1) Net (decrease) increase Amount Shares Amount Shares Year ended December 31, 2003 Class A $ (2,408,135) (101,674) $ (395,047) (18,068) Class B (82,223) (3,502) 30,104 1,196 Class C (46,686) (1,989) 59,750 2,394 Class F (68,012) (2,847) 40,900 1,651 Class 529-A (1,893) (78) 31,513 1,295 Class 529-B (373) (15) 6,925 286 Class 529-C (881) (35) 10,402 428 Class 529-E (81) (3) 1,955 81 Class 529-F (29) (1) 709 29 Class R-1 (760) (31) 1,608 66 Class R-2 (8,100) (342) 29,735 1,248 Class R-3 (15,665) (670) 42,012 1,785 Class R-4 (4,201) (174) 31,835 1,330 Class R-5 (5,556) (217) 37,886 1,503 Total net increase (decrease) $ (2,642,595) (111,578) $ (69,713) (4,776) Year ended December 31, 2002(2) Class A $ (3,217,263) (133,389) $ (382,022) (20,355) Class B (96,136) (4,053) 107,919 4,006 Class C (46,109) (1,969) 118,359 4,568 Class F (48,639) (2,052) 90,093 3,535 Class 529-A (818) (36) 44,274 1,759 Class 529-B (81) (4) 9,014 361 Class 529-C (247) (11) 12,577 501 Class 529-E (5) -* 1,763 73 Class 529-F -* -* 229 10 Class R-1 (2) -* 178 8 Class R-2 (1,911) (86) 7,022 318 Class R-3 (4,035) (182) 10,943 495 Class R-4 (188) (9) 7,106 319 Class R-5 (7,474) (326) 62,832 2,396 Total net increase (decrease) $ (3,422,908) (142,117) $ 90,287 (2,006)
* Amount less than one thousand. (1) Includes exchanges between share classes of the fund. (2) Class 529-A, 529-B, 529-C, 529-E and 529-F shares were offered beginning February 15, 2002. Class R-1, R-2, R-3, R-4 and R-5 shares were offered beginning May 15, 2002. 6. RESTRICTED SECURITIES The fund has invested in certain securities for which resale may be limited to qualified buyers or which are otherwise restricted. These securities are identified in the investment portfolio. As of December 31, 2003, the total value of restricted securities was $603,538,000, which represented 2.85% of the net assets of the fund. 7. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES The fund made purchases and sales of investment securities, excluding short-term securities, of $5,266,791,000 and $5,506,954,000, respectively, during the year ended December 31, 2003. The fund receives a reduction in its custodian fee equal to the amount of interest calculated on certain cash balances held at the custodian bank. For the year ended December 31, 2003, the custodian fee of $1,002,000 included $7,000 that was offset by this reduction, rather than paid in cash. Financial Highlights (1) Income (loss) from investment operations(2) Net Net asset gains(losses) value, Net on securities Total from beginning investment (both realized investment of period income and unrealized) operations CLASS A: Year ended 12/31/2003 $22.23 $.50 $6.52 $7.02 Year ended 12/31/2002 27.45 .42 (5.14) (4.72) Year ended 12/31/2001 31.16 .40 (3.34) (2.94) Year ended 12/31/2000 32.59 .42 .90 1.32 Year ended 12/31/1999 28.92 .41 6.45 6.86 CLASS B: Year ended 12/31/2003 22.19 .31 6.51 6.82 Year ended 12/31/2002 27.40 .23 (5.14) (4.91) Year ended 12/31/2001 31.12 .18 (3.34) (3.16) Period from 3/15/2000 to 12/31/2000 31.93 .15 1.02 1.17 CLASS C: Year ended 12/31/2003 22.17 .30 6.51 6.81 Year ended 12/31/2002 27.39 .21 (5.14) (4.93) Period from 3/15/2001 to 12/31/2001 28.52 .11 (1.13) (1.02) CLASS F: Year ended 12/31/2003 22.22 .49 6.52 7.01 Year ended 12/31/2002 27.44 .40 (5.14) (4.74) Period from 3/15/2001 to 12/31/2001 28.56 .28 (1.12) (.84) CLASS 529-A: Year ended 12/31/2003 22.22 .50 6.52 7.02 Period from 2/15/2002 to 12/31/2002 26.71 .33 (4.34) (4.01) CLASS 529-B: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/19/2002 to 12/31/2002 26.27 .16 (3.91) (3.75) CLASS 529-C: Year ended 12/31/2003 22.22 .27 6.52 6.79 Period from 2/15/2002 to 12/31/2002 26.71 .16 (4.34) (4.18) CLASS 529-E: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 3/7/2002 to 12/31/2002 28.13 .26 (5.85) (5.59) CLASS 529-F: Year ended 12/31/2003 22.22 .45 6.52 6.97 Period from 9/23/2002 to 12/31/2002 21.22 .12 1.08 1.20 CLASS R-1: Year ended 12/31/2003 22.19 .27 6.54 6.81 Period from 6/19/2002 to 12/31/2002 26.04 .13 (3.75) (3.62) CLASS R-2: Year ended 12/31/2003 22.18 .30 6.51 6.81 Period from 5/21/2002 to 12/31/2002 27.39 .14 (5.13) (4.99) CLASS R-3: Year ended 12/31/2003 22.21 .40 6.52 6.92 Period from 6/4/2002 to 12/31/2002 26.66 .18 (4.38) (4.20) CLASS R-4: Year ended 12/31/2003 22.21 .48 6.53 7.01 Period from 7/25/2002 to 12/31/2002 21.75 .22 .55 .77 CLASS R-5: Year ended 12/31/2003 22.23 .56 6.53 7.09 Period from 5/15/2002 to 12/31/2002 27.62 .28 (5.34) (5.06) Dividends and distributions Dividends (from net Distributions Total Net asset investment (from capital dividends and value, end income) gains) distributions of period CLASS A: Year ended 12/31/2003 $(.40) $- $(.40) $28.85 Year ended 12/31/2002 (.50) - (.50) 22.23 Year ended 12/31/2001 (.40) (.37) (.77) 27.45 Year ended 12/31/2000 (.40) (2.35) (2.75) 31.16 Year ended 12/31/1999 (.40) (2.79) (3.19) 32.59 CLASS B: Year ended 12/31/2003 (.21) - (.21) 28.80 Year ended 12/31/2002 (.30) - (.30) 22.19 Year ended 12/31/2001 (.19) (.37) (.56) 27.40 Period from 3/15/2000 to 12/31/2000 (.13) (1.85) (1.98) 31.12 CLASS C: Year ended 12/31/2003 (.20) - (.20) 28.78 Year ended 12/31/2002 (.29) - (.29) 22.17 Period from 3/15/2001 to 12/31/2001 (.11) - (.11) 27.39 CLASS F: Year ended 12/31/2003 (.39) - (.39) 28.84 Year ended 12/31/2002 (.48) - (.48) 22.22 Period from 3/15/2001 to 12/31/2001 (.28) - (.28) 27.44 CLASS 529-A: Year ended 12/31/2003 (.40) - (.40) 28.84 Period from 2/15/2002 to 12/31/2002 (.48) - (.48) 22.22 CLASS 529-B: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/19/2002 to 12/31/2002 (.30) - (.30) 22.22 CLASS 529-C: Year ended 12/31/2003 (.18) - (.18) 28.83 Period from 2/15/2002 to 12/31/2002 (.31) - (.31) 22.22 CLASS 529-E: Year ended 12/31/2003 (.30) - (.30) 28.83 Period from 3/7/2002 to 12/31/2002 (.33) - (.33) 22.21 CLASS 529-F: Year ended 12/31/2003 (.37) - (.37) 28.82 Period from 9/23/2002 to 12/31/2002 (.20) - (.20) 22.22 CLASS R-1: Year ended 12/31/2003 (.21) - (.21) 28.79 Period from 6/19/2002 to 12/31/2002 (.23) - (.23) 22.19 CLASS R-2: Year ended 12/31/2003 (.22) - (.22) 28.77 Period from 5/21/2002 to 12/31/2002 (.22) - (.22) 22.18 CLASS R-3: Year ended 12/31/2003 (.31) - (.31) 28.82 Period from 6/4/2002 to 12/31/2002 (.25) - (.25) 22.21 CLASS R-4: Year ended 12/31/2003 (.39) - (.39) 28.83 Period from 7/25/2002 to 12/31/2002 (.31) - (.31) 22.21 CLASS R-5: Year ended 12/31/2003 (.46) - (.46) 28.86 Period from 5/15/2002 to 12/31/2002 (.33) - (.33) 22.23 Ratio of Ratio of Net assets, expenses net income Total end of period to average to average return(3) (in millions) net assets net assets CLASS A: Year ended 12/31/2003 31.96% $19,212 .66% 2.08% Year ended 12/31/2002 (17.34) 15,201 .67 1.68 Year ended 12/31/2001 (9.55) 19,331 .65 1.41 Year ended 12/31/2000 4.27 19,872 .64 1.28 Year ended 12/31/1999 24.58 16,603 .63 1.33 CLASS B: Year ended 12/31/2003 30.97 836 1.44 1.30 Year ended 12/31/2002 (17.97) 618 1.45 .91 Year ended 12/31/2001 (10.24) 653 1.42 .64 Period from 3/15/2000 to 12/31/2000 3.73 299 1.39 (5) .53 (5) CLASS C: Year ended 12/31/2003 30.93 413 1.50 1.23 Year ended 12/31/2002 (18.06) 266 1.50 .86 Period from 3/15/2001 to 12/31/2001 (3.60) 203 1.55 (5) .49 (5) CLASS F: Year ended 12/31/2003 31.92 311 .71 2.02 Year ended 12/31/2002 (17.38) 203 .72 1.65 Period from 3/15/2001 to 12/31/2001 (2.97) 153 .74 (5) 1.31 (5) CLASS 529-A: Year ended 12/31/2003 31.99 88 .68 2.03 Period from 2/15/2002 to 12/31/2002 (15.16) 39 .76 (5) 1.64 (5) CLASS 529-B: Year ended 12/31/2003 30.74 19 1.61 1.10 Period from 2/19/2002 to 12/31/2002 (14.35) 8 1.62 (5) .77 (5) CLASS 529-C: Year ended 12/31/2003 30.75 27 1.60 1.11 Period from 2/15/2002 to 12/31/2002 (15.74) 11 1.60 (5) .79 (5) CLASS 529-E: Year ended 12/31/2003 31.42 4 1.08 1.61 Period from 3/7/2002 to 12/31/2002 (19.92) 2 1.07 (5) 1.35 (5) CLASS 529-F: Year ended 12/31/2003 31.72 1 .82 1.81 Period from 9/23/2002 to 12/31/2002 5.65 - (4) .22 .51 CLASS R-1: Year ended 12/31/2003 30.90 2 1.50 (6) 1.08 Period from 6/19/2002 to 12/31/2002 (13.91) - (4) 1.50 (5,6) 1.11 (5) CLASS R-2: Year ended 12/31/2003 30.93 45 1.46 (6) 1.19 Period from 5/21/2002 to 12/31/2002 (18.22) 7 1.46 (5,6) 1.05 (5) CLASS R-3: Year ended 12/31/2003 31.45 66 1.08 (6) 1.60 Period from 6/4/2002 to 12/31/2002 (15.75) 11 1.08 (5,6) 1.41 (5) CLASS R-4: Year ended 12/31/2003 31.91 48 .71 1.94 Period from 7/25/2002 to 12/31/2002 3.51 7 .32 (6) .96 CLASS R-5: Year ended 12/31/2003 32.34 112 .39 2.30 Period from 5/15/2002 to 12/31/2002 (18.34) 53 .40 (5) 1.91 (5)
YEAR ENDED DECEMBER 31 2003 2002 2001 2000 1999 Portfolio turnover rate for all classes of shares 31% 38% 29% 43% 46%
(1) Based on operations for the period shown (unless otherwise noted) and, accordingly, may not be representative of a full year. (2) Year ended 1999 is based on shares outstanding on the last day of the year; all other periods are based on average shares outstanding. (3) Total returns exclude all sales charges, including contingent deferred sales charges. (4) Amount less than 1 million. (5) Annualized. (6) During the start-up period for this class, CRMC voluntarily agreed to pay a portion of the fees relating to transfer agent services. Had CRMC not paid such fees, expense ratios would have been 1.70%, 1.94% and 1.10% for classes R-1, R-2 and R-3, respectively, during the year ended December 31, 2003, and 4.20%, 1.64%, 1.13% and .34% for classes R-1, R-2, R-3 and R-4, respectively, during the period ended December 31, 2002. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF FUNDAMENTAL INVESTORS, INC.: We have audited the accompanying statement of assets and liabilities of Fundamental Investors, Inc. (the "Fund"), including the investment portfolio, as of December 31, 2003, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Fundamental Investors, Inc. as of December 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Los Angeles, California February 5, 2004 TAX INFORMATION (UNAUDITED) We are required to advise you within 60 days of the fund's fiscal year-end regarding the federal tax status of certain distributions received by shareholders during such fiscal year. As a result of recent tax legislation, individual shareholders are now eligible for reduced tax rates on qualified dividend income received during the year. For purposes of computing the dividends eligible for reduced tax rates, 98% of the dividends paid by the fund from net investment income are considered qualified dividend income. Corporate shareholders may exclude up to 70% of qualifying dividends received during the year. For purposes of computing this exclusion, 90% of the dividends paid by the fund from net investment income represent qualifying dividends. Certain states may exempt from income taxation that portion of the dividends paid from net investment income that was derived from direct U.S. government obligations. For purposes of computing this exclusion, 0.17% of the dividends paid by the fund from net investment income were derived from interest on direct U.S. government obligations. Dividends and distributions received by retirement plans such as IRAs, Keogh-type plans and 403(b) plans need not be reported as taxable income. However, many retirement plan trusts may need this information for their annual information reporting. SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX INFORMATION WHICH WILL BE MAILED IN JANUARY 2004 TO DETERMINE THE AMOUNTS TO BE INCLUDED ON THEIR 2003 TAX RETURNS. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISERS. -----END PRIVACY-ENHANCED MESSAGE-----